Tag Archives: manufacturing

Why The S&P 500 Is Likely To Revisit The Correction Lows Near 1870

In spite of the Fed’s decision to refrain from a borrowing cost hike, SPY’s price movement strongly suggests the ultra-accommodating policy of zero percent interest rates may be inadequate. We’re likely heading back to the recent low point for the current year. The reality is that our recovery is stalling and has been since the end of the Fed’s quantitative easing stimulus. In Selling The Drama Or Buying The Rally (8/27), I delineated the way in which 10%-plus price corrections had unfolded under similar circumstances in history (e.g., 1998, 2010, 2011, etc.). Specifically, when the prospects for the global economy are deteriorating, U.S. stock benchmarks typically reclaim about one-half of their losses on “hope rallies.” Afterwards, they retest their lows. The most recent example of the price movement phenomenon is the eurozone crisis. In late July/early August of 2011, the S&P 500 SPDR Trust ETF (NYSEARCA: SPY ) plunged 16% due to fears surrounding economic malaise and financial credit concerns in Portugal, Italy, Greece and Spain. The popular ETF then recovered one-half (nearly 8%) of its price decline in late August/September before revisiting new lows in early October. At that point, the European Central Bank (ECB) and the Federal Reserve dropped market-moving hints about extraordinary stimulus measures, effectively ending the panicky price depreciation. In the same vein, the present corrective phase for SPY stopped short at roughly 12%. The popular ETF then retraced about one-half of the price erosion (6%) on two recent occasions. And now, in spite of the Federal Reserve’s decision to refrain from a borrowing cost hike (probably for 2015 in its entirety), SPY’s price movement strongly suggests that the ultra-accommodating policy of zero percent interest rates may be inadequate; that is, we’re likely heading back to the recent low point of the current year. Shouldn’t the Fed’s September decision to hold off any increases in borrowing costs have catapulted the U.S. stock market higher? Shouldn’t we have seen speculative buying demand for riskier assets like high yield bonds and growth stocks? Not when the U.S. has been contending with a sharp slowdown in exports, manufacturing activity as well as consumer sentiment. Not when the Atlanta Fed forecasts anemic GDP of 1.5% for the third quarter. And not when chairwoman Janet Yellen acknowledges the absence of wage inflation as well as the the presence of labor troubles via the labor participation rate. Prior to the rapid-fire declines for the Dow, S&P 500 and Nasdaq in mid-August, I detailed these economic concerns in extraordinary detail. I highlighted the dreadful manufacturing data in the Philly Fed Survey as well the Empire State Manufacturing Survey in 15 Warning Signs Of A Market Top . On, July 30th, I pointed to economic weakness in both the U.S. and across every region of the globe as being one of 5 reasons to lower one’s allocation to riskier assets . Going into yesterday’s (9/17) monumental Fed decision, traders had been positioning themselves for further delay on an increase in borrowing costs. They got it. And yet, they got more than they had bargained for. Not only did the Fed highlight weakness in the global economy as a potential threat to the domestic economy, but they shot down the notion of so many economists and analysts that the U.S. economy is standing on “terra firma.” For amusement, revisit what the overwhelming majority of journalists and media personalities had been saying about the strength of the U.S. economy. After, glance at the analysis and commentary a day later. The chief economist at Natixis Asset Management explained that the Fed’s decision not to act demonstrates that committee members of the central bank clearly think that the U.S. economy is “very weak.” Oh really? Now the economy is very weak? Or how about Dan Veru, chief investment officer at Palisade Capital Management, explaining that the Fed doesn’t want to be responsible for possibly unraveling a “fragile recovery.” Fragile recovery? After six-and-and-a-half years? Wasn’t this the great U.S. expansion that was perfectly capable of a modest move away from the emergency level zero bound? Sometimes, the truth hurts. The reality is that our recovery is stalling and has been since the end of the Fed’s quantitative easing stimulus. This truth is painful for everyday Americans. The fact that corporate sales and earnings growth are both on the decline also stings because, absent a more definitive Fed commitment to zero rate policy or more stimulus or a sloth-like token hike, riskier assets are likely to struggle. In essence, at certain correction levels, the Federal Reserve tends to take certain actions and/or make certain statements to boost market confidence. That level for the S&P 500 is near 1870. Obviously, I cannot know that the S&P 500 will revisit 1870, but I believe it is far more probable than not. Let me repeat. I anticipate the broader S&P 500 retesting the lows of the current correction, though it is impossible for any person to predict the direction of stock assets. For those moderate growth/income investors that have been emulating the tactical asset allocation that I do for actively managed clients, we are maintaining the lower risk profile of 50% equity (mostly large-cap domestic), 25% bond (mostly investment grade) and 25% cash/cash equivalents. This has been the case since we began reducing risk exposure in June-July. The typical target allocation for moderate growth/income of 65%-70% stock (e.g., large, small, foreign, domestic) and 30% income (e.g., investment grade, high yield, short, long, etc.) will not be reestablished until market internals and fundamentals show signs of improvement. Popular holdings for the 50% equity component? We have ETFs like iShares S&P 500 (NYSEARCA: IVV ), iShares USA Minimum Volatility (NYSEARCA: USMV ), SPDR Select Health Care (NYSEARCA: XLV ) and Vanguard Mid Cap Value (NYSEARCA: VOE ). Funds like USMV and VOE have weathered the storm better than many of the leading market-cap-weighted benchmarks. Disclosure : Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.

Mutual Funds To Buy Amid Global Jitters

Global growth fears have been prominent in recent times. Dismal economic data out of China had sparked jitters in the global markets. Also, disappointing factory data in the Eurozone recently, dampened investor sentiment. The record exports data from Germany was a bright spot, but that is not enough to dispel the global growth fears. In fact China, the second largest economy, poses a big threat as acknowledged by the IMF. They believe China’s slowdown may have graver repercussions on other countries than what was forecasted. The U.S. markets were not immune to the global market rout, but economic data looks convincing enough to suggest that the U.S. is relatively better positioned. Latest data showed that the U.S. economy has recovered significantly from the sluggish growth conditions in the first quarter. In this situation, mutual funds that mostly hold companies with a domestic focus are likely to gain from improving fundamentals. China, Europe Jitters China The China Federation of Logistics and Purchasing reported that the official manufacturing PMI index declined to a three-year low in August to 49.7 from July’s reading of 50. Meanwhile, the final Caixin Manufacturing Purchasing Managers’ index fell from 47.8 in July to 47.3 in August, reaching its lowest level in the last 77 months. The reading below 50 signaled that manufacturing activity contracted in August. Moreover, a plunge of 8.3% in exports and a decline of 8.1% in imports in July indicated the world’s second biggest economy is suffering from both weak global and domestic demand. It was also reported that producer prices declined to the lowest level in six years in July. Yesterday, data from China proved to be dismal once more. Fears of China-led global slowdown intensified after the National Bureau of Statistics in China showed China’s fixed-asset investment growth slowed to 10.9% in the first eight months of 2015. This is the weakest in about 15 years. Alongside, factory output increased 6.1% in August from prior year period. This missed the market expectations of a 6.4% gain. China stocks dropped the most it had in three weeks and also dampened sentiment in the U.S. markets. These disappointing data raised concerns that China may fail to achieve the target of 7% GDP growth rate this year Europe Investors are also worried about the economic condition of Europe. The final reading of Markit’s manufacturing PMI came in at 52.3 in August, below July’s reading of 52.4. Though the reading of the index reached a 16-month high in Germany, the reading out of France and Italy declined to the lowest level in the last four months. Meanwhile, the Markit/Cips U.K. manufacturing PMI declined from 51.9 in July to 51.5 in August, indicating a slowdown in manufacturing activity in the U.K. Meanwhile, it was also reported that the Euro zone’s inflation rate was at only 0.2% in August, significantly below the targeted rate of 2%. Last month, Eurosat reported that the common currency bloc expanded at a rate of only 0.3% in the second quarter, down from the first quarter’s growth rate of 0.4%. Last week, the Bank of England (BOE) decided to keep the key interest rate unchanged. The committee members voted 8-1 in favor of keeping the interest rate flat at 0.5%. It acknowledged that the China developments has increased downside risk to the global economy, but didn’t see any effect on the U.K. economy yet. The U.K. Office for National Statistics recently reported that manufacturing production declined at an adjusted rate of 0.8% in July, compared to a rise of 0.2% in the previous month. Most of the manufacturing sub-sectors witnessed a decline in production during July. The bright spot from Europe has been the Germany exports data. According to Germany’s Federal Statistics Office, exports gained a seasonally adjusted 2.4% from the prior month to 103.4 billion euros ($115.35 billion) in July. Imports were up 2.2% to 80.6 billion euros. These are the highest values since records started in 1991. Both exports and imports comprehensively beat expectations of gains of 0.7% and 0.5% respectively. On a seasonally adjusted basis, foreign trade balance showed a surplus of 22.8 billion euros. U.S. Shows Strength Amid the global concerns, the U.S. has done relatively well. Right now, uncertainty prevails over the rate hike decision. It is not clear if the FED will raise rates during the two-day policy meeting that begins tomorrow. However, the economic indicators are fairly encouraging. Despite global growth coming to a grinding halt, the “second estimate” released by the U.S. Department of Commerce last month showed that the GDP in the second quarter advanced at a pace of 3.7%, significantly higher than the first quarter’s rise of only 0.6%. The report also showed that gross domestic purchases surged at a rate of 3.4% during the quarter compared to a gain of 2.5% in the first indicating an increase in domestic demand. Also, the personal consumption expenditure (PCE) price index gained 1.5% during the quarter, a turnaround from the first quarter’s 1.9% decline. Though August jobs data came lower than expected, June and July’s job additions were revised higher. Analysts note that August’s job numbers have been revised higher later due to seasonal factors. Separately, the unemployment rate fell to 5.1% in August, its lowest level since Apr 2008. The unemployment rate was also lower than the consensus estimate of 5.2%. The unemployment rate was within the Fed’s goal of full employment. 3 Domestic Funds to Buy Funds that have limited international exposure should be more shielded from global growth concerns. Meanwhile, these domestically focused funds are poised to benefit from the favorable economic environment in the U.S. Thus, we present 3 funds that hardly have foreign stock holdings. The following funds also carry a Zacks Mutual Fund Rank #1 (Strong Buy). We expect the funds to outperform its peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund. The funds have encouraging year-to-date, 1-year and 3 and 5-year annualized returns. The minimum initial investment is within $5000. The Oppenheimer Discovery Fund A (MUTF: OPOCX ) primarily focuses on acquiring common stocks of domestic companies having impressive growth potential. OPOCX invests in securities of small cap companies having market capitalizations below $3 billion. As of the last filing, OPOCX, a Small Growth fund, allocates their fund in two major groups; Small Growth and Large Growth. OPOCX currently carries a Zacks Mutual Fund Rank #1. The fund has gained 6.7% and 9.6% in the year-to-date and 1-year periods. The 3 and 5 year annualized returns are 14% and 17.7%. Expense ratio of 1.12% is lower than the category average of 1.33%. The Neuberger Berman Mid Cap Growth Fund A (MUTF: NMGAX ) invests a large chunk of its assets in companies having market cap size identical to those included in the Russell Midcap Index. NMGAX maintains a diversified portfolio by investing in common stocks of companies across a wide range of sectors and industries. NMGAX may focus on specific sectors that are expected to gain from market or economic trends. NMGAX, as of the last filing, allocates their fund in three major groups; Small Growth, Large Growth and Large Value. NMGAX currently carries a Zacks Mutual Fund Rank #1. The fund has gained 7.1% and 11.1% in the year-to-date and 1-year periods. The 3 and 5 year annualized returns are 14.8% and 15.5%. Expense ratio of 1.11% is lower than the category average of 1.29%. The Diamond Hill Select Fund A (MUTF: DHTAX ) seeks to provide capital growth over the long term. DHTAX invests in 30-40 U.S. equities which the Adviser believes are undervalued. These equity securities may be of any size. The adviser estimates a company’s value devoid of its market price and also takes into effect the industry competition, regulatory factors and various industry factors among others. As of the last filing, DHTAX, a Large Value fund, allocates their fund in three major groups; Large Value, Large Growth and High Yield Bond. DHTAX currently carries a Zacks Mutual Fund Rank #1. The fund has gained 2.9% and 7.5% in the year-to-date and 1-year periods. The 3 and 5 year annualized returns are 18.8% and 15.2%. Expense ratio of 1.20% is however higher than the category average of 1.11%. Link to the original post on Zacks.com

The Stock Market’s Best Shot? A Fed Promise To Move Slower Than A Three-Toed Sloth

The U.S. economy is even more dependent on the consumer than it ought to be. And by extension, consumer credit as well as service-oriented business credit become more critical than they might otherwise be. And what affects credit more than the Federal Reserve? Until investors learn the what, when and why of Fed policy guidance, riskier assets will remain volatile. Consumers, as opposed to manufacturers, represent two-thirds of the U.S. economy. Indeed, Americans love to splurge. We buy sneakers, iPhones, home furnishings, real estate, cars, jewelry, concert tickets, and meals at our favorite restaurants. We even buy chew toys for our pets. Many of us, however, do not have enough cash saved up to acquire the things that we want when we want them. So we borrow. We satisfy our cravings through instruments of debt – credit cards, mortgages, “refis,” equity lines and school loans. Like consumers, there are scores of corporations that borrow more than they should and gorge when ultra-low interest rates beckon. How do companies do it? They issue low-yielding bonds to yield-seeking investors. Theoretically, companies can use the newfound dollars on research, development, marketing, equipment and human resources. In 2015, though, public corporations are spending an estimated 28% of their available cash on acquiring shares of their stock. That’s the highest percentage since 2007. Why do companies buy so much of their own stock in what the investing community calls “share buybacks?” Less stock in the marketplace limits supply, boosts the perception of profitability per share and artificially boosts buyer demand; prices tend to move higher. Stock prices rise in the early stages of accelerating corporate share buybacks. For instance, in the bull market of 2002-2007, public companies committed more and more of their total cash; the higher the prices moved, the less shares that corporate borrowed dollars could afford. As buybacks peaked in 2007, they rapidly descended during the 2008-2009 financial collapse. Now look at the current economic recovery since the 2nd quarter of 2009. Share buybacks have been on a strong upward trajectory, pushing stock market benchmarks to new heights. In fact, one of the big reasons that so many executives have been lobbying the U.S. Federal Reserve to hold off on hiking borrowing costs in September is because those costs would adversely impact the financing of stock buybacks at ultra-low bond yields. Are consumers and corporations the only groups that salivate over ultra-low interest rates? Hardly. The federal government debt is rapidly approaching $19 trillion. In particular, obligations have grown by approximately $8 trillion since the recovery’s inception – a pace that is more than twice as fast as the growth of the U.S. economy itself. That’s right. Uncle Sam is spending borrowed dollars at an alarming clip, guaranteeing that higher and higher percentages of total tax revenue will be used for debt servicing. (Recognize that nobody believes in the notion that debts could ever be paid back.) Why might this be troublesome at this particular moment? The Federal Reserve has wanted to hike borrowing costs as early as mid-September. And that means that Uncle Sam will likely be paying higher rates to service the interest charges on its treasury bonds very soon. What’s more, if the Federal Reserve hikes borrowing costs, consumers will have to pay more to service adjustable loans and mortgages; businesses will have to pay more to service the interest on corporate bonds. The probable result? The economy slows and possibly contracts such that Uncle Sam brings in less-than-anticipated tax revenue. Indeed, the Fed has been spooking markets with its desire to move toward “rate normalization.” If committee members spoke candidly about a more realistic intention – a plan to move no more than 1% off of the 0% anchor by the end of 2016 – there would be an end game that global investors could factor into decision making. Instead, there is fear that the Fed is misreading the tea leaves on the health of the U.S. economy as well as fear that the central bank would move to far in the wrong direction. Consider the manufacturing slowdown – the “less important” one-third of the U.S. economy. Does anyone doubt that U.S. manufacturing has suffered due to the global manufacturing slowdown and the outright recessions in places like Canada, Brazil and parts of the euro-zone? The recent jobs report by ADP confirms it. Of the 190,000 jobs created, 173,000 received the tag of “service-providing” whereas a meager 17,000 had been deemed “goods-producing.” Should we dismiss that oil giant Conoco Phillips is laying off 10% of its global workforce? What about critical metrics such as factory new orders and product shipments? The percentages for both are negative on a year-over-year basis. Global manufacturing woes did not just hit the investment markets in August; rather, the declines have been developing in key economic sectors since the fourth quarter of 2014. Every significant manufacturer-dependent sector in the exchange-traded investing world – iShares Dow Jones Transportations (NYSEARCA: IYT ), Industrials Select Sector SPDR (NYSEARCA: XLI ), Energy Select Sector SPDR (NYSEARCA: XLE ), Materials Select Sector SPDR (NYSEARCA: XLB ) – is down 10% or more year-to-date. It follows that the U.S. economy is even more dependent on the consumer than it ought to be. And by extension, consumer credit as well as service-oriented business credit become more critical than they might otherwise be. And what affects credit more than the Federal Reserve? Until investors learn the what, when and why of Fed policy guidance, riskier assets will remain volatile. Intra-day price swings of 300 points on the Dow? We should feel lucky if it remains that subdued. As regular readers already know, I began reducing client exposure to risk before the mid-August price plunge. We raised cash/cash equivalents in our accounts . Those levels are roughly 25% for moderate growth investors. The cash is there to reduce portfolio volatility, minimize depreciation in portfolios and provide opportunity to buy quality assets at lower prices. We also have 25% allocated to investment-grade income. Whereas moderate risk clients may typically have 65-75% in stocks, we gradually reduced that level to 50% across June and July. Our reasons for the tactical asset allocation shift? I presented them in ” A Market Top? 15 Warning Signs ” when the S&P 500 traded in and around the 2100 level. The 50% allocated to stock is spread across a variety of large-cap U.S. ETFs, including but not limited to, iShares S&P 100 (NYSEARCA: OEF ), Vanguard High Dividend Yield (NYSEARCA: VYM ), Health Care Select Sector SPDR (NYSEARCA: XLV ) and Vanguard Mid-Cap Value (NYSEARCA: VOE ). Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert website. ETF Expert content is created independently of any advertising relationships.