Markets Drop on Fed Fears

The Markets:

Stocks entered the holiday weekend down on worries that the Fed might cut back its quantitative easing. For the week, the S&P 500 dropped 1.07%, the Dow lost 0.33%, and the Nasdaq lost 1.14%.[1]

Fed officials went into a full-court communications press as markets wobbled on fears the Fed might begin shuttering its bond-buying program. To counter these worries, Fed officials stressed that there is no rush to exit and that the program is not on “autopilot;” rather, bond purchases will be scaled up or down as future conditions warrant. In a speech before the Joint Economic Committee, Fed Chairman Ben Bernanke warned that premature tapering could stall the recovery and reiterated that any tightening of monetary policy would be cautious and considered.[2]  While it’s good news that the Fed isn’t rushing for the exits, we can expect additional volatility in the coming months as markets prepare for the end of easy Fed money.

While markets reacted poorly to the Fed’s news, economic data last week was generally positive. The number of Americans applying for unemployment benefits fell last week, pointing to continued resilience in the jobs market despite the effects of sequestration. The improving employment picture is also propping up the housing market and consumer sentiment, with rising home prices supporting consumption and keeping Americans upbeat. The drop in unemployment claims erased most of the previous weeks’ increase and indicates that employers are not laying off workers despite the fiscal austerity.[3]

Markets will be very focused on the economy this week, as a number of important economic reports are due to be released, including: consumer confidence, revised Q1 GDP, housing reports, and weekly jobless claims. The Thursday jobs report, the last one before the June 7th release of the May jobs report, will be closely watched as traders look for clues about final May numbers. The May report is the next major milestone for the Fed since it has targeted a 6.5% unemployment rate as part of its mandate. If there is significant improvement over the 165,000 new jobs created in April, we can expect the Fed to look for confirmation over the next few months and begin to talk more seriously about tapering the bond program.[4]

Headlines:

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Durable goods orders rise. A surprisingly high increase in orders for long-lasting factory goods suggests that a manufacturing slowdown may be ending. New orders for factory goods rose 3.3% in April, roundly beating estimates of a 1.5% increase.[5]

Public schools spent less per student in 2011. In a sign that the Great Recession has reached public school budgets, a Census report shows that the amount per student spent by schools fell in 2011 for the first time in more than 30 years. Overall, nationwide school spending dropped less than one percent per student, but the number reflects greater declines in certain geographic areas.[6]

China’s factory activity shrinks in May. Chinese factory production fell for the first time in seven months, indicating that its economic recovery may have stalled and another recession may be imminent. Since China is largely a manufacturing-based economy, policy makers must decide whether to act now to boost growth or risk a cool-off while laying groundwork for long-term economic activity.[7]

Oil prices drop on weak economic outlook. Brent crude dropped close to $102 per barrel after disappointing economic data from China and high oil supplies in the U.S. forecasted softer demand. Weaker demand and ample gasoline stockpiles in the U.S. might mean lower oil prices this summer.[8]

Disclaimers and Sources:

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Diversification does not guarantee profit nor is it guaranteed to protect assets. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.  The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896. The Nasdaq Composite is an index of the common stocks and similar securities listed on the NASDAQ stock market and is considered a broad indicator of the performance of stocks of technology companies and growth companies. The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indexes from Europe, Australia and Southeast Asia.

The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

Google Finance is the source for any reference to the performance of an index between two specific periods.

Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

Past performance does not guarantee future results.

You cannot invest directly in an index.

Consult your financial professional before making any investment decision.

Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.


These are the views of Platinum Advisor Marketing Strategies, LLC, and not necessarily those of the named representative, Broker dealer or Investment Advisor, and should not be construed as investment advice. Neither the named representative nor the named Broker dealer or Investment Advisor gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.


By clicking on these links, you will leave our server, as they are located on another server. We have not independently verified the information available through this link. The link is provided to you as a matter of interest. Please click on the links below to leave and proceed to the selected site.

[1] http://briefing.com/investor/markets/weekly-wrap/weekly-wrap-for-may-20-2013.htm

[2] http://www.reuters.com/article/2013/05/23/us-fed-bullard-idUSBRE94M0GO20130523

[3] http://www.reuters.com/article/2013/05/24/us-usa-economy-idUSBRE94M0K220130524

[4] http://www.cnbc.com/id/100764914

[5] http://www.reuters.com/article/2013/05/25/us-durable-goods-idUSBRE94N0FR20130525

[6] http://www.cnbc.com/id/100765235

[7] http://www.reuters.com/article/2013/05/23/us-china-economy-flash-pmi-idUSBRE94M02720130523

[8] http://news.yahoo.com/brent-drops-towards-102-weak-demand-outlook-hurts-081811016.html

Minnesota Tax Changes

Late last night, the Minnesota Senate passed a comprehensive tax bill that makes significant changes to individual, corporate, and sales taxes in Minnesota.  The governor is expected to sign the bill into law.  Below are some of the key points that have been announced since the law’s passage a few hours ago.

  • Individuals with taxable income of more than $150,000, and married couples with taxable income of more than $250,000 will pay a new, 9.85% rate on the dollars over those limits.
    • This means Minnesota now has the 4th highest top individual income tax rate in the country.
    • This also imposes a significant “marriage penalty” on these earners, since the threshold for married couples isn’t twice that for single people.
  • The taxes on a pack of cigarettes will increase by $1.60 to a total of $2.83.
  • Businesses purchasing capital equipment will be allowed an up-front exemption from sales tax on those purchases, though the definition of “capital equipment” and the procedure for taking advantage of the exemption haven’t yet been announced.
  • Commercial warehousing and storage services, electronic repair services and the sale of telecommunications equipment will now be subject to sales tax. These items were previously exempt.
  • There is money in the law to help hold down property tax increases, and possibly increase the number and amount of property tax refunds available to homeowners and renters, but the details on this are also yet to be announced.

New Tax Rates and Other News

After a rather quiet spring, there has been a flurry of tax-related activity and news from both the State Capitol in St. Paul, as well as Capitol Hill in Washington.  Here are a few things to keep your eye on.

  • At the State Capitol, lawmakers are debating a tax bill that will raise income taxes on the “top 2% of taxpayers” to a new top rate of 9.4%, giving Minnesota the 4th highest tax rates in the country. There is some confusion on what the “top 2%” actually is. Some reports place this new top tax rate on married taxpayers with taxable income of more than about $140,000, while other reports state the new top rate will kick in on married taxpayers with taxable income of more than $250,000. The House passed the bill late last night, and the Senate has yet to vote on the matter. No matter how it passes, the Governor is expected to sign it.
  • The same tax bill being debated in the Senate lowers the sales tax in Minnesota from 6.875% to 6.0%, but subjects a number of things to sales tax that were previously exempt, most notably all clothing, warehousing services, and attorney’s services. It also raises the per-pack cigarette tax significantly.
  • In the wake of the IRS appearing to inappropriately target conservative organizations seeking non-profit status, the acting commissioner of the IRS has stepped down, and will face a second day of questioning by the Senate today.
  • Also, due to the cuts imposed by the sequester, the IRS will be closed entirely this Friday, May 24th. No phone lines will be answered, no returns will be processed, and all enforcement activity will cease for that day. This is the first of a number of scheduled closures that will take place over the summer.

We will keep a close watch on the votes at the State Capitol and let you know the details once they pass the final tax bill.

Weekly Economic Update

The Markets:

Markets turned out another solid performance last week as all three major indices reached new highs. With minimal economic data for investors to chew on, earnings drove most of the market action last week. On Tuesday, the S&P 500 set a new high while the Dow notched its first close above the 15,000 mark. Industrials, technology, and consumer discretionary stocks led the gains while utilities and consumer staples dropped. For the week, the S&P 500 added 1.19%, the Dow gained 0.97%, and the Nasdaq increased 1.72%.[1]


As we near the end of earnings season, 90% of S&P 500 companies have reported in, with 67% beating earnings expectations. If all remaining companies post numbers in line with estimates, earnings will be up 5.3% over the first quarter of 2012. However, most companies are still missing their revenue estimates, with only 46% beating their own revenue projections. Next week, a handful of major retailers are due to report, which, along with Monday’s retail sales report, will give sector analysts a lot to think about.[2]


After markets closed for the weekend, Federal Reserve officials announced their strategy for unwinding QE3, their unprecedented $85 billion per month bond-buying program. While they didn’t confirm the timing of intended moves, officials said they plan to reduce bond purchases in careful, measured steps as they monitor the job market and inflation. Because it doesn’t look like the Fed intended this announcement to mark the end of quantitative easing, it appears they meant to signal their flexibility in managing the programs in the months ahead.[3]


Looking ahead, the bulls could keep running next week as long as economic reports on labor, retail sales, industrial production, and manufacturing don’t disappoint. However, with equities reaching new highs, there are plenty of opportunities for weakness to end the run. If investors think that markets are overbought, some consolidation might occur. The market activity thus far suggests that investors are betting on increasing economic growth, and the Fed’s announcement seems to indicate that officials aren’t too worried about the U.S. economy at this time. As always, we’ll keep an eye on the action and will keep you informed.


ECONOMIC CALENDAR:
Monday: Retail Sales, Business Inventories
Tuesday: Import and Export Prices
Wednesday: Producer Price Index, Empire State Mfg. Survey, Treasury International Capital, Industrial Production, Housing Market Index, EIA Petroleum Status Report
Thursday: Consumer Price Index, Housing Starts, Jobless Claims, Philadelphia Fed Survey
Friday: Consumer Sentiment

Disclaimers and Sources

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Diversification does not guarantee profit nor is it guaranteed to protect assets. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896.  The Nasdaq Composite is an index of the common stocks and similar securities listed on the NASDAQ stock market and is considered a broad indicator of the performance of stocks of technology companies and growth companies. The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indexes from Europe, Australia and Southeast Asia. The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market. Google Finance is the source for any reference to the performance of an index between two specific periods. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. You cannot invest directly in an index. Consult your financial professional before making any investment decision. Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors. These are the views of Platinum Advisor Marketing Strategies, LLC, and not necessarily those of the named representative, Broker dealer or Investment Advisor, and should not be construed as investment advice. Neither the named representative nor the named Broker dealer or Investment Advisor gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.  By clicking on these links, you will leave our server, as they are located on another server. We have not independently verified the information available through this link. The link is provided to you as a matter of interest. Please click on the links below to leave and proceed to the selected site.

[1]  http://briefing.com/investor/markets/weekly-wrap/weekly-wrap-for-may-6-2013.htm

[2]  http://www.cnbc.com/id/100727118

[3]  http://online.wsj.com/article/SB10001424127887324744104578475273101471896.html

[4]  http://www.usatoday.com/story/money/business/2013/05/08/late-payment-rate-mortgages-1q/2143699/

[5]  http://www.cnbc.com/id/100727407

[6]  http://www.reuters.com/article/2013/05/10/usa-economy-budget-idUSL2N0DR3LK20130510

[7]  http://thedailyrecord.com/2013/05/12/u-s-shows-budget-surplus-for-april/#ixzz2TAvsbAQI

[8]  http://www.latimes.com/business/autos/la-fi-hy-lower-summer-gasoline-prices-20130508,0,996849.story

How is the Economy Really Doing?

U.S. markets closed out last week with a bang, after a better-than-expected jobs report eased concerns about a stalled economic recovery. The S&P 500 and Dow both surged to new highs on the news, with the S&P 500 closing out the week above 1,600 and the Dow briefly topping 15,000. For the week, the S&P 500 gained 2.03%, the Dow gained 1.78%, and the Nasdaq gained 3.03%.[1]


Friday’s Employment Situation report showed that the economy added a solid 165,000 jobs in April, dropping the headline unemployment rate to 7.5%. Even better, the report showed revised numbers for February and March, indicating that economic activity was stronger than originally estimated.[2] On the downside, when we dig deeper into the jobs report, we see threats to consumer spending as the average weekly hours worked dropped to 34.4 while wages increased just 0.2%. Furthermore, what economists believe to be the widest measure of unemployment, the U-6, rose slightly to 13.9%, its lowest point since December 2008.[3] The U-6 includes frustrated workers who have given up looking for a job, plus people who are working part-time because they can’t find full-time work. All factors considered, the jobs picture looks lukewarm.


We realize this information could raise some questions, so briefly, let’s take stock of how the recovery is progressing:


Hiring and unemployment are both growing at a measured pace. On the employment front, the economy has been adding an average of 196,000 jobs per month in 2013; this is far better than the 179,000 monthly average in 2011 and 2012, but still not as good as we would like. At the current rate of growth, the U.S. won’t reach pre-recession hiring levels for at least another year. The unemployment rate has improved drastically from its 10% peak in 2009; however, at 7.5%, the current rate is still recession level, and the Fed doesn’t expect to hit 6% until 2015 at the soonest.
[4]


The economy is improving slowly. The economic recovery from the recession is the slowest since WWII. The economy grew 2.12% in 2012 and 2.5% in Q1 2013; in a normal economic cycle, these growth numbers would be perfectly respectable, but we need higher growth during recovery periods to generate enough jobs to bring down unemployment. Economists had hoped to see stronger growth this year (even as high as 3-4%), but the combined effect of the new payroll tax and across-the-board sequestration cuts is dragging down economic performance.[5]


Economic fundamentals and stock market performance are looking better. Despite worries about higher payroll taxes, consumers spent at the strongest pace in two years during Q1 2013. This is good news since consumer spending accounts for 70% of economic growth. The housing market is booming, fueled by record-low mortgage rates and higher housing prices. New-home sales were up 18.5% in March (from the prior year), and homebuilders were working on more than 1 million new homes in March for the first time in five years. Markets are also performing well above expectations: For the year, the Dow has gained over 14% and the S&P 500 has increased by more than 13%, showing that investors are ready to pile onto any good news.[6]


All told, the U.S. economy is doing pretty well. We could wish for a faster recovery, but we have to work with the hand we’re dealt. While we may see a slower second quarter, economists still expect healthy economic growth in 2013.