Weekly Commentary October 26th, 2015

The Markets

Central banks were at it again – and markets loved it.

Last week, European Central Bank (ECB) President Mario Draghi surprised markets when he indicated the ECB’s governing council was considering cutting interest rates and engaging in another round of quantitative easing. The Economist explained European monetary policy was heavily tilted toward growth before the announcement:

“The ECB is already delivering a hefty stimulus to the Euro area, following decisions taken between June 2014 and early 2015. It has introduced a negative interest rate, of minus 0.2%, which is charged on deposits left by banks with the ECB. It has also been providing ultra-cheap, long-term funding to banks provided that they improve their lending record to the private sector. And, most important of all, in January it announced a full-blooded program of quantitative easing (QE) – creating money to buy financial assets – which got under way in March with purchases of €60 billion ($68 billion) of mainly public debt each month until at least September 2016.”

Despite these hefty measures, recovery in the Euro area has been anemic, and deflation remains a significant issue. According to Draghi, Euro area QE is expected to continue until there is “a sustained adjustment in the path of inflation.” Europe is shooting for 2 percent inflation, just like the United States.

The People’s Bank of China (PBOC) eased monetary policy last week, too. On Monday, data showed the Chinese economy grew by 6.9 percent during the third quarter, year-over-year. Projections for future growth remain muted, according to BloombergBusiness. On Friday, the PBOC indicated it was cutting interest rates for the sixth time in 12 months.

U.S. markets thrilled to the news. The Dow Jones Industrial Average, Standard & Poor’s 500 Index, and NASDAQ were all up more than 2 percent for the week. Many global markets delivered positive returns for the week, as well.

it’s important to ask the right questions. A recent article in The Economist examined the “gig” economy. You know, people selling crafts online, offering their services as taxi drivers, renting their cars and spare bedrooms for short periods. Some folks even rent space on their driveways to commuters. It’s that old American ingenuity and, as it turns out, it’s difficult to quantify.

Analysts expected this employment revolution to be reflected in self-employment statistics. However, the self-employment rate in the United States has declined during the past two decades, according to Pew Research.

Why would self-employment be falling when more people appear to be offering services independently? The Wall Street Journal suggested several possibilities: 1) The gig model might not be prevalent even though some headline-grabbing companies rely on it; 2) It’s possible gig companies operate in industries that have always depended on independent contractors; or 3) people who do this work may report they are employees of the firms they work for rather than independent contractors.

The Economist concurred with the last, suggesting that people do not consider their gigs to be work. If that’s the case, then governments may not be asking the right questions when they try to assess the situation. A British survey that focused its queries on alternative employment found that about 6 percent of respondents participated in the gig economy.

Does it matter? Should anyone be concerned the dimensions of this segment of the economy are relatively unknown? The Economist suggests it is important:

“Measuring the gig economy matters. To get a clear picture on living standards, you need to understand how people combine jobs, work, and other activities to create income. And, this gets to the crucial question of whether the gig economy represents a positive or negative development for workers. All this makes it important for official agencies to have a go at measuring it.”

What’s the solution? The Wall Street Journal suggested the U.S. Congress might want to reconsider funding the U.S. survey of Contingent and Alternative Employment Arrangements. The last time it was conducted was 2005.

 

Weekly Focus – Think About It

“The function of education is to teach one to think intensively and to think critically. Intelligence plus character – that is the goal of true education.”

--Martin Luther King, Jr., Civil rights activist

Weekly Commentary October 19th, 2015

The Markets

How quickly emotions have changed since August. Worry? Angst? It’s already priced into the markets, according to some experts.

Last week, Barron’s published the results of its Big Money Poll, a biannual survey of professional investors and money managers. A majority of those surveyed (55 percent) were bullish about U.S. markets’ prospects through June 2016, 29 percent were neutral, and 16 percent were bearish. That’s a big shift. Last spring, just 45 percent of those polled were bullish and nearly one-half were neutral. This time around, things are different:

“After a wild and crazy summer for U.S. stocks, marked by an 11 percent correction in August, Wall Street’s bulls are showing conviction again…the pros expect stocks to rise by as much as 7 percent through the middle of 2016, propelled by a growing economy and gains in corporate profit. The Big Money investors see fresh value in beaten-up energy stocks and financials, as well as dividend-paying blue chips. And, they don’t expect a likely interest-rate hike – when it comes – to break the bull’s stride for long.”

Investors who participated in the American Association of Individual Investors’ October 14 Sentiment Survey weren’t quite so optimistic. The survey showed just 34 percent of investors were bullish, 39 percent were neutral, and 27 percent were bearish. The bulls were down 3 percent from the previous week, and the bears gained a percent. Uncertainty seemed to be the name of the game, though, as the number of investors who held neutral opinions increased by 4 percent.

As an interesting side note, the professionals surveyed by Barron’s estimated the number of investors who weren’t sure where markets are headed was much larger – 76 percent!

If you’re a contrarian – an investor who does not subscribe to popular opinion – there are a lot of opinions to consider.

it’s not always a good idea to rollover company stock from a 401(k) plan to an IRA. In fact, doing so might mean you pay more in taxes to Uncle Sam than necessary.

If company stock held in an employer-sponsored 401(k) plan has appreciated, the difference between the amount paid for shares (the cost basis) and the current value of those shares is known as net unrealized appreciation (NUA). For instance, if an investor paid $10 a share for 1000 shares ($10,000) for stock that is now worth $15 a share, then the investment is worth $15,000, and the NUA is $5,000.

If the shareholder completes a rollover from a 401(k) plan to an IRA, those shares of company stock will be liquidated, along with the other assets in the account, and moved to an IRA where the assets will have an opportunity to continue growing tax-deferred. When the assets are distributed from the IRA, they may be taxed as ordinary income. If the investor is in the 28 percent tax bracket, the taxes owed would be about $4,200.

There is an alternative that could be a better choice tax-wise. An investor can request company stock be distributed in-kind and sent to a taxable account. The stock is not liquidated. The shares are moved to the new account. The investor may owe ordinary income taxes (and penalties if he or she is not yet age 59½) on the cost basis ($10,000). However, the net unrealized appreciation ($5,000) will not be taxed until the shares are sold. Taxes on the cost basis would be about $2,800.

If the investor takes a distribution right away, and the shares have been held for more than one year, the proceeds may be taxed at the long-term capital gains tax rate, which is currently lower than the ordinary income tax rate. If the investor is in the 15 percent capital gains tax bracket, another $750 would be owed in taxes. In this example, the investor could save about $650 in taxes overall.

Please keep in mind this is a hypothetical example and is not representative of any specific situation.  Each investor is unique and your results may vary.  Executing an NUA strategy seems pretty straightforward, but it can be tricky and not everyone is eligible. If you would like to learn more, please give your tax professional a call.

 

Weekly Focus – Think About It

“If you wish to forget anything on the spot, make a note that this thing is to be remembered.”

--Edgar Allan Poe, American poet

Weekly Commentary October 12th, 2015

The Markets

They’re investors. They’re allowed to change their minds.

Just a few weeks ago, on September 17, the Federal Reserve Open Market Committee (FOMC) decided to leave the fed funds rate unchanged. In part, this was because, “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.”

The next day, September 18, stock markets tumbled. By the time September was over, many markets had closed on their worst quarter in four years, according to the BBC. The Dow Jones Industrial Average fell by almost 8 percent, Britain’s FTSE 100 was down 7 percent, Germany’s Dax was off by almost 12 percent, and the Shanghai Composite lost more than 24 percent.

Last week, on Thursday, the minutes of the FOMC meeting were released. Investors’ response was quite different. Barron’s reported many believe a rate hike during 2015 is less likely than it once was, and that reinvigorated investor optimism:

“Going into Friday’s session, global equity markets’ valuations were enriched by some $2.5 trillion, according to Bloomberg calculations. As for U.S. stocks, Wilshire Associates reckons that they tacked on 3.44 percent, or approximately $800 billion, over the full week, based on the gain in the Wilshire 5000 index, their biggest weekly gain in nearly 12 months.”

Why does the same news elicit two very different responses? There are many reasons. Foremost among them is the fact a lot of elements influence markets – investor confidence, company valuations, central bank actions, automated trading, and many others.

What does last week’s upward push mean? One analyst cited by Barron’s suggested we’re seeing a bear market rally, but only time will tell.

do you Hate doing the laundry? Then, you May be in luck. The world’s most recent laundry bot was introduced at Japan’s 2015 Combined Exhibition of Advanced Technologies (CEATEC), a technology trade show. The Telegraph reported the robot was developed to eliminate the tedium of laundry, which (as moms and dads everywhere know) is one of the least popular household chores. Not only does ‘Laundroid’ wash and dry clothes, it also can sort them, fold them, and put them away in a cupboard.

If you’re thinking, it sounds to good to be true, you’re right – for now. Digital Trends pointed out Laundroid works quite slowly:

“The last laundry-folding robot we saw in action took a long time to get a small towel neatly folded into a little rectangle, and that was with the video sped up. Laundroid is no faster, based on a demonstration at the CEATEC...It took several minutes for the robot – hidden inside a futuristic-looking black cabinet – to fold up a freshly washed T-shirt, according to Engadget. Although it did the task decently, if not in Martha Stewart-approved style, it’s obviously not ready to take on a basket full of jeans and sheets.”

The fly in the ointment is the bot must determine a shirt is a shirt, and a pair of pants is a pair of pants, and so on, before it can fold items. After all, each item is folded differently. Socks, it seems, pose a particularly ticklish challenge. So, how long does it take? Laundroid needs about seven hours to fold a basket of clothes.

If you have a lot of laundry, you may want to check back in a few years.

 

Weekly Focus – Think About It

“Human subtlety will never devise an invention more beautiful, more simple, or more direct than does nature because in her inventions nothing is lacking, and nothing is superfluous.”

--Leonardo da Vinci, Inventor

Cycle of Investing

Many of us had the opportunity to watch the recent supermoon lunar eclipse, which inspired pictures, videos, and late evenings. Part of what makes a lunar eclipse so special is that we rarely pay attention to the moon. We only stop and stare when we see a dramatic change in the night sky, but most of the time the moon subtly changes each night as it progresses through its cycle month after month. Similarly, economic cycles can be counted on to continue month after month, and we need to remember that market downturns are part of the natural cycle of investing.  

The soft September 2015 jobs report—with just 142,000 net new jobs created during the month, below the consensus expectation of a 201,000 gain—sparked more questions about the current economic cycle. July and August readings were also revised lower and added to investor disappointment.

The Institute for Supply Management’s (ISM) Manufacturing Purchasing Managers’ Index (PMI) for September 2015 added to investor worries. The reading of 50.2 was the lowest since May 2013. Although heavily influenced by the recent drop in oil prices, the report indicated the manufacturing sector is holding just above 50—the level that indicates expansion.

Taken together, the jobs report and ISM survey increased fears about a potential economic slowdown, or worse, a recession. However, it is important to remember that fluctuation from month to month is part of the cycle. As recently as this past March, private jobs creation disappointed with an initial reading of just 117,000, only to be followed by strong gains above 200,000 for the subsequent four months. Furthermore, a dip in the ISM manufacturing survey below 50 has occurred, often more than once, during the past three economic expansions without a recession ensuing.

We still believe a recession is unlikely and are encouraged by the less closely watched ISM Non-Manufacturing Report on Business for September, which indicated that the service sector, which comprises 70% of the economy, remains robust and is consistent with real gross domestic product (GDP) growth of 3.5%. Additionally, sales of two of the biggest ticket items consumers will purchase, a home or a car, remain strong, with auto sales on pace for an 11-year high.

Despite concerns over recent top data releases, we believe it is premature to think about the dreaded “r” word. Several bright spots remain present in the economy, and the silver lining of recent jobs and ISM data is that the Federal Reserve likely does not have the rationale to raise interest rates in October, and December is looking much less likely.

The supermoon was a spectacular sight, but part of what made it so remarkable was how unusual it was. When we think of the cycle of investing, we do not want to become fixated on short-term volatility at the expense of longer-term investment goals.

Weekly Commentary October 5th, 2015

The Markets

Well, third quarter was a humdinger.

It began with the first International Monetary Fund (IMF) default by a developed country (Greece) and finished with Hurricane Joaquin possibly headed toward the east coast. In between, China’s stock market tumbled, the Federal Reserve tried to interpret conflicting signals, and trade growth slowed globally.

After such a stressful quarter, we may see an uptick in the quantity of alcoholic beverages consumed per person around the world. That number had declined (along with economic growth in China) between 2012 and 2014, according to The Economist.

No Grexit – for now

Despite defaulting on its IMF loan, rejecting a multi-billion-euro bailout plan, and closing its banks for more than two weeks, Greece was not forced out of the Eurozone. Instead, Europe cooked up a deal that left the IMF unhappy and analysts shaking their heads.

The Economist reported the new deal for Greece was an exercise in wishful thinking. The problem is the deal relies on “the same old recipe of austerity and implausible assumptions. The IMF is supposed to be financing part of the bailout. Even it thinks the deal makes no sense.” It’s a recipe we’re familiar with in the United States: When in doubt, defer the problem to the future.

A downturn in China

Despite reports from the Chinese government that it hit its economic growth target (7 percent) on the nose during the first two quarters of the year, The Economist was skeptical about the veracity of those claims. During the first quarter:

“Growth in industrial production was the weakest since the depths of the financial crisis; the property market, a pillar of the economy, crumbled. China reported real growth (i.e., after accounting for inflation) of 7 percent year-on-year in the first quarter, but nominal growth of just 5.8 percent.”

That statistical sleight of hand implies China experienced deflation early in the year. It did not.

On a related note, from mid-June through the end of the third quarter, the Shenzhen Stock Exchange Composite Index fell from 3,140 to about 1,716, according to BloombergBusiness. That’s about a 45 percent decline in value.

Red light, green light at the Federal Reserve

Green light: employment numbers. Red light: consumer prices, inflation expectations, wages, and global growth. Late in the quarter, the Federal Reserve decided not to begin tightening monetary policy. According to Reuters, voting members of the Federal Open Market Committee (FOMC) decided uncertainty in global markets had the potential to negatively affect domestic economic strength.

They may have been right. The Wall Street Journal reported, although unemployment remained at 5.1 percent, just 142,000 jobs were added in September. That was significantly below economists’ expectations that 200,000 jobs would be created. The Journal suggested the labor market has downshifted after 18 months of solid jobs creation.

Global trade in the doldrums

The global economy isn’t as robust as many expected it to be. According to the Business Standard, the World Trade Organization (WTO) lowered its forecast for global trade growth during 2015 from 3.3 percent to 2.8 percent. Falling demand for imports in developing nations and low commodity prices are translating into less global trade. Expectations are trade growth will be 3.9 percent in 2016, which could help support global economic growth.

change is coming. America’s share of the global economy is potent. Our country accounts for 16 percent (after being adjusted for currency differences) of the world’s gross domestic product (GDP) and 12 percent of merchandise trade. According to The Economist, we dominate “the brainiest and most complex parts of the global economy.” Our presence is strong in social media, cloud computing, venture capital, and finance. In addition, the dollar is the world’s dominant currency.

While the view from the top is pleasing, we may not be there forever. The Economist explained:

“In the first change in the world economic order since 1920-45, when America overtook Britain, [America’s] dominance is now being eroded. As a share of world GDP, America and China (including Hong Kong) are neck and neck at 16 percent and 17 percent respectively, measured at purchasing-power parity. At market exchange rates, a fair gap remains with America at 23 percent and China at 14 percent… But any reordering of the world economy’s architecture will not be as fast or decisive as it was last time…the Middle Kingdom is a middle-income country with immature financial markets and without the rule of law. The absence of democracy, too, may be a serious drawback.”

It may be hard to believe, in light of recent economic and market events in China, but change is on its way. Regardless, the influence of the United States should continue to be powerful well into the future.

 

Weekly Focus – Think About It

“Governing a great nation is like cooking a small fish – too much handling will spoil it.”

--Lao Tzu, Chinese philosopher