While I continue to favor the stock market as the top investment vehicle long-term, I am concerned about the pending rise in interest rates and bond yields; of course, higher bond yields translate into a viable option for investors to stash their capital aside from the stock market.
The Federal Reserve has begun the process that will reduce the easy money it has been injecting into the stock market and economy. So far, $30.0 billion in bond purchases each month has been cut, and I expect the remaining $55.0 billion to be eliminated by the year-end.
The end result will be a steady rise in bond yields along the way, which will cause some rotation of capital from the equities market to bonds. We have already seen a big jump in the 10-year bond yield, from about 1.7% in May 2013 to 2.8% as of April 2014. The yields will continue to rise as the Fed reduces its quantitative easing over the year. A move to above the three-percent threshold level will clearly trigger some anxiety among stock investors
The consensus on the Street is for bond yields to rise. The recent auction of $29.0 billion of seven-year notes by the U.S. Department of the Treasury last Thursday yielded 7.317%.
Simply look at the chart below of the 10-Year US Treasury Yield Index from 1990 to 2014.
Chart courtesy of www.StockCharts.com
The first thing you should notice is the rising yields. The chart from 2012 onward reflects the rise in interest rates measured by the bellwether 10-year U.S. Treasury that is surging higher. The yields on U.S. Treasuries have almost … Read More
Remember what happened in the U.S. economy when the financial system was about to collapse? The banks weren’t lending to each other, businesses, or even consumers. The U.S. economy was in a deep economic slowdown. Investment banks like the Lehman Brothers had already collapsed and more would follow. Something had to be done or else it would be a disaster situation.
When all of this was happening, the Federal Reserve stepped in to save the U.S. economy. It started to use a monetary policy tool called quantitative easing. The idea was simple: print money out of thin air and then buy back bad debt from the banks. As a result of this, the banks would have liquidity, which would eventually create more lending, moving the U.S. economy towards the path of economic growth.
You can look at Japan as another example of this. In order to fight the economic slowdown in that country, the Bank of Japan took similar actions to those of the Federal Reserve—I must say, the central bank of Japan has been involved with quantitative easing for a while.
The central bank of Japan wanted economic growth, which was what the Federal Reserve had hoped for in the U.S. economy. Japan’s central bank believed that by introducing quantitative easing, the value of the currency would go down and exports from the country would increase. The Bank of Japan also hoped that the quantitative easing would take the country away from the deflationary period it has been experiencing for some time.
With this in mind, you will come across various arguments. Some will say that quantitative easing has … Read More
The verdict is in…
The Federal Reserve will taper further. In its statement, the Federal Reserve said, “Beginning in April, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $25 billion per month rather than $30 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $30 billion per month rather than $35 billion per month.” (Source: Board of Governors of the Federal Reserve System web site, March 19, 2014.) The Federal Reserve has been tapering quantitative easing since January by $10.0 billion each month, coming down from $85.0 billion a month in December.
To us, it will not to be a surprise to see the Federal Reserve taper further. If this becomes the case, then in just five months, there will be no quantitative easing. The printing presses will stop.
This doesn’t bother me. It’s all too known and expected.
With this taper announcement, the central bank also provided its projections on where the federal funds rate—the rate at which the Federal Reserve lends to the banks—will go. It said the rate can increase to one percent by 2015. By 2016, this rate can go up to two percent. Mind you, the federal funds rate has been sitting at 0.25% for some time now—since the U.S. economy was in the midst of the financial crisis.
What happens next?
Economics 101 tells us that when interest rates increase, bond prices decline and bond yields increase.
Quantitative easing and low interest rates have caused more harm than good. These two phenomena caused the bond prices to rise and … Read More
Investors are asking one question these days: should you be buying emerging market stocks or will they decline further?
In the long run, I am bullish on the emerging markets. The reason for this is very simple: the emerging market economies have a significant amount of room to grow. For example, in some emerging countries, a massive portion of the population still lives without electricity; there are not enough homes; roads aren’t there to sustain the population; industries aren’t developed; and the list goes on…
Understanding what’s happening in emerging market stocks now is very important for those who are looking to invest. When the Federal Reserve started to implement its easy monetary policies, investors rushed to the emerging markets; they could get better returns there. Now that the Federal Reserve is threatening the prospects of easy money, investors are worried and selling.
Since we started to hear speculations that the Federal Reserve would taper its quantitative easing, investors have been rushing out of the emerging markets. No matter where you look in the emerging markets, you will see key stock indices facing a sell-off.
Look at the chart of Turkey’s stock market below. It’s down more than 30% since June of 2013.
Chart courtesy of www.StockCharts.com
Turkey’s stock market is just one example; other emerging markets stocks are sliding lower as well. For example, China’s stock market is down more than 12% since June of last year. The Brazilian stock market is down about 20% for the same period.
According to my analysis, it shouldn’t be a surprise to see the stocks in emerging markets slide even lower. You … Read More
Federal Reserve Chair Janet Yellen has confirmed what most already knew. The recovery in the U.S. jobs market is far from complete. Yellen noted that the unemployment rate has improved since the Federal Reserve initiated its last round of quantitative easing in late 2012, falling from 8.1% to 6.6%. Curiously, in 2013, the U.S. economy grew just two percent.
That said, against the backdrop of a so-called improving U.S. economy, the numbers of the long-term unemployed and part-time workers are far too high. In fact, 3.6 million Americans, or 35.8% of the country’s unemployed, fall under the “long-term unemployed” umbrella—that is, those who have been out of work for more than 27 weeks. The underemployment rate (which includes those who have part-time jobs but want full-time jobs and those who have given up looking for work) remains stubbornly high at 12.7%.
The improving unemployment numbers come on the heels of two straight months of weak jobs numbers. In January, economists were expecting the U.S. to add 180,000 new jobs to the U.S. economy; instead, just 113,000 new jobs were added. In December, economists were projecting 200,000 new jobs would be added—instead, the number was an anemic 74,000.
For the head of the Federal Reserve, this translates into more money being dumped into the bond market ($65.0 billion per month) and a continuation of artificially low interest rates.
Once again, bad news for Main Street is good news for Wall Street. After Yellen’s speech, the S&P 500, NYSE, and NASDAQ responded by surging higher. Again, the Federal Reserve’s ongoing bond buying program and open-ended artificially low interest rate environment is great … Read More
There are a significant number of concerns regarding the emerging markets at this time. Investors are asking if emerging market stocks are a good buy right now; are the troubles over or are there still more to come?
As it stands, it seems further troubles are brewing in the emerging markets, as the Federal Reserve tapers its quantitative easing program. We have seen currencies in countries like Turkey, South Africa, Russia, and Argentina decline significantly.
You see, when the Federal Reserve first started to lower its interest rates and initiated quantitative easing; it gave birth to a trade. The idea behind this trade was simple: you borrowed money from a low-interest-rate country—the U.S.—then invested that money in a high-interest-rate-paying country—the emerging markets, like Turkey—and banked the difference. The Federal Reserve tapering its quantitative easing is drying up the liquidity—the money that went to high-interest-paying countries has to come back now. This is what’s creating troubles.
Before I go into further detail, I want to restate my opinion on the emerging markets and their stocks: in the long run, they can be very profitable. My main reason for this belief is that emerging markets need infrastructure, meaning construction companies and utilities companies will be profitable. These markets also have massive populations and the middle-class is on the rise, meaning consumer discretionary stocks and companies in the service sector will see growth as a result.
Where are the opportunities in the emerging markets now?
One rule of thumb is that when there’s a broad market sell-off, even companies with great fundamentals and solid track records get punished. Investors sell these stocks in … Read More
There’s uncertainty on the stock market. Troubles are coming from the emerging markets, and they are causing investors to panic and sell their stocks. We see they are scared. But as this is happening, there’s a trade in the making, and those investors who have raised some cash (as I’ve been suggesting my readers do) and are looking to park their money somewhere safer than stocks can profit from this opportunity.
The trade I’m talking about is the trade that’s happening in U.S. bonds and gold bullion—some call this phenomenon a “flight to safety.” I call it a potential opportunity.
We know bonds and gold bullion are one of those asset classes where investors rush to when the risks on the stock market increase. This is something we are seeing now, and it could continue for some time.
In the following chart, I have plotted the prices of U.S. bonds (red line), gold bullion (black line), and the S&P 500 (green line). Take a look at the circled area, which shows the movement out of stocks.
Chart courtesy of www.StockCharts.com
Since the beginning of the year, U.S. bonds and gold bullion prices have increased in value, while the stocks have fallen. We have seen this relationship before as well. A prime example of this is the stock market sell-off in 2009; we saw investors rush to gold bullion and bonds then in hopes of finding safety.
It’s not too late for investors to consider taking advantage of this shift by looking at exchange-traded funds (ETFs), like iShares 20+ Year Treasury Bond (NYSEArca/TLT). Through this ETF, investors can invest in long-term … Read More
If January is any indication of the stock market action in 2014, we’re in for a long year. After a scorching year, the key stock indices are ending the first month of 2014 in the red. As we say goodbye to January, it’s worth noting that the S&P 500, after notching up five-percent in the first month of 2013, gave up three percent of its value during the first month of 2014.
The other indices aren’t faring any better. The NYSE posted a 3.8% gain in January 2013, but lost 3.2% of its value in January 2014. The Dow Jones Industrial Average gained six percent in January 2013, but at the close of January 2014, it’s down almost five percent.
But, if you listen to the overly optimistic statisticians, a bad January does not necessarily portend a bad year. Since 1962, in January, the S&P 500 has fallen by more than four percent nine times. But, when that occurs, the S&P 500 is actually up between February and the end of the year—though barely. During those nine years with losing Januarys, the average February–year-end returns tallied 1.08%. (Source: Ratner, J., “A weak January for stocks isn’t as bad as you think,” Financial Post, January 31, 2014.)
Though, there are some statistical anomalies in there that might just be helping the so-called as-goes-January seasonal anomaly, in two of the nine years (1968 and 2009), the S&P 500 reported double-digit gains over the final 11 months of the year. In 1968, the S&P 500 was up 12.1%; in 2009, it was up 35.3%.
In the same time, the S&P 500 saw a … Read More
Back in December, Bernanke decided the U.S. economy was on solid footing and initiated the first round of quantitative easing cutbacks to begin in January. Instead of dumping $85.0 billion into the U.S. economy, the Fed added just $75.0 billion.
Last Wednesday, in his final hurray as chairman of the Federal Reserve, Ben Bernanke initiated the second round of tapering. Citing growing strength in the broader U.S. economy, Bernanke slashed the Federal Reserve’s quantitative easing program to $65.0 billion a month starting in February.
At this pace, the Federal Reserve will be out of the bond buying business by Labor Day. As for interest rates, Bernanke reiterated the Federal Reserve’s guidance; short-term interest rates will remain near zero until the jobless rate hits 6.5%. But not even that is an automatic trigger. When unemployment does hit 6.5%, it will take inflation, the state of the labor market, and the state of the financial markets into consideration.
In light of the current U.S. economic environment, I’m not so sure I’d hang my hat on the so-called “growing strength in the broader economy.”
For starters, U.S. unemployment remains high. It dropped unexpectedly to 6.7% in December, but that number was skewed by a large number of long-term unemployed workers abandoning their search for new jobs. Of those who did find jobs, most were in the retail industry.
Those working in low-salary jobs don’t have much to look forward to. Wages are stagnant. In fact, workers’ wages and salaries are growing at the lowest rate relative to corporate profits in U.S. history.
Furthermore, for the first time ever, working-age people make up the … Read More
After years of easy money and a failure to secure a well-executed exit plan, it looks as though the emerging markets are getting a taste of the Federal Reserve’s economic tapering. Over the last five years, the emerging markets have benefited from low interest rates and listless growth in developed countries.
But, with the U.S., Japan, and Europe—the three biggest economies globally—all expanding for the first time in four years, the tables are turning and the sheen is beginning to wear on the emerging markets.
In an effort to help kick start the U.S. economy after the financial crisis in 2008, the Federal Reserve enacted it’s overly generous bond buying program (quantitative easing). All told, the Federal Reserve dumped more than $3.0 trillion (and counting) into the markets and has kept interest rates artificially low.
The ultra-low interest rates might have been great for home buyers, but income-starved investors had to look elsewhere to pad their retirement portfolio. Many retail and institutional investors went to the emerging markets, where the interest rates were higher and there was a real opportunity for growth.
In December, the Federal Reserve said it was going to begin tapering its $85.0-billion-per-month quantitative easing strategy to $75.0 billion a month in January. Just yesterday, the Fed announced it will be reducing that number to $65.0 billion a month in February. While the amount is negligible, it signals the eventual end of artificially low interest rates. The cheap money that propped up asset prices in emerging markets, like India, China, and Indonesia, is beginning to crumble.
The Argentinean peso, Indian rupee, South African rand, and Turkish lira … Read More
Out of the first seven trading days of 2014, the S&P 500 declined on five of those days, marking the worst start to the year for the stock market since 2005. This phenomenon has raised many questions. Looking at this, investors are asking how the returns on the S&P 500 will look this year. Why? Because in 2005, the S&P 500 only increased by 2.87%.
In 2005, the months of July and November were good for the S&P 500; the index increased by more than 3.5% in each of those months. On the other hand, January, March, and April were the worst-performing months that year. In these months, the S&P 500 declined by more than two percent. (Source: StockCharts.com, last accessed January 15, 2014.)
Will the S&P 500 follow the same trajectory in 2014 as it did in 2005?
As it stands, I believe the S&P 500 may perform worse than it did in 2005. As I’ve mentioned in these pages many times before, there are many factors that are leading me to believe this can happen; for example, we are seeing a surge in optimism towards stocks—stock advisors are the most bullish they’ve been since the last market sell-off. As well, the U.S. economic growth isn’t really surprising when you look much deeper into the details, and most importantly; the Federal Reserve has announced that it will start to reduce its asset purchases (quantitative easing). When combined, these phenomena could bring the S&P 500’s performance down this year.
Regardless, you have to keep one of the most important lessons of investing in mind: don’t predict tops and bottoms. The … Read More
The merriment, mirth, and cheer on Wall Street over the holiday season may have been a bit premature; in fact, the optimism about the U.S. economy that ushered in the New Year may have already come to a screeching halt.
In mid-December, the Federal Reserve surprised investors when it announced it was going to start tapering it’s generous $85.0-billion-per-month easy money policy in January to just $75.0 billion per month. The pullback was a surprise, because the Federal Reserve initially hinted it wouldn’t ease its monetary policy until the U.S. unemployment rate fell to 6.5% and inflation rose to 2.5%. At the time of the announcement, U.S. unemployment stood at seven percent and inflation was hovering around historic lows below one percent.
The Federal Reserve moved sooner than expected with its tapering because of a (so-called) stronger U.S. economy and jobs growth. And, going forward, it said that U.S. unemployment figures will improve faster than expected. But, a raft of new economic numbers is calling that optimistic forward guidance into question.
In December, the U.S. economy created just 74,000 jobs, the slowest pace in three years, with the majority of the jobs (55,000) coming from the retail industry. Despite the weak jobs growth, the U.S. unemployment rate managed to fall from seven percent to 6.7%—the lowest rate since October 2008. But numbers are deceiving—the big drop in the unemployment rate was primarily a result of 347,000 people dropping out of the labor force.
Throughout 2013, the U.S. economy created 2.18 million jobs; in 2012, the U.S. economy created 2.19 million jobs. Looking at this from another angle, in 2013, the … Read More
If the stock market is an indicator of U.S. economic health, then 2013 was a stellar year. The Dow Jones Industrial Average closed out 2013 with a 26% gain. The S&P 500 was up 29%, while the NASDAQ Composite was up 34%.
Despite a stellar 2013, the crystal ball for the U.S. economy and Wall Street in 2014 remains murky. That’s because investors might have to actually consider the health of the U.S. economy this year. Now granted, the U.S. economy kicked into high gear last January after the federal government avoided the dreaded fiscal cliff. Thanks to some recent economic indicators, the start of 2014 has been more subdued.
Factory activity in China hit a three-month low in December. While Germany and Italy reported healthy manufacturing numbers, British manufacturing growth eased and France hit a seven-month low of 47.0 (scores below 50 indicate contraction). Here at home, the U.S. economy got a boost after it was announced that manufacturing hit an 11-month high in December of 55.0, up from 54.4 in November. (Source: Weisenthal, J., “This Manufacturing Report From France Is Just Plain Ugly,” Business Insider, January 2, 2014.)
To show it believes the U.S. economy is improving, the Federal Reserve recently announced that it will begin to taper its quantitative easing efforts this month. Instead of pumping $85.0 billion per month into the U.S. economy, it is going to purchase just $75.0 billion in bonds.
And to quell investors’ fears, the Federal Reserve said it will continue to keep interest rates artificially low until the unemployment rate hits 6.5% or lower—a target that probably won’t be reached until … Read More
Investors are a surprising lot. Since May, any suggestions about tapering by the current Federal Reserve chairman, Ben Bernanke, or even one of the dozen district Federal Reserve economists, sent the markets reeling.
Back in May, just the whisper of a hint from the Fed that it might consider tapering its $85.0-billion-per-month bond buying program was enough to stop the bull market in its tracks. It recovered, of course, but only after Bernanke soothed the markets by saying he had no intention of pulling back on the Fed’s quantitative easing (QE) policy anytime soon.
The general fear, of course, was that any reduction in QE would translate into an immediate rise in interest rates. Having kept interest rates artificially low (near zero), the Fed made it cheaper for people to borrow. As a result, these artificially low interest rates are generally recognized as being the fuel that’s been propelling the stock market increasingly higher.
The Federal Reserve quashed those fears last week after announcing a $10.0-billion monthly cut in its QE strategy by telling investors it wouldn’t raise interest rates until unemployment hits 6.5%. By the Fed’s own estimates, the country will not hit this target until late 2014 to mid-2015. So, artificially low interest rates live on.
The assurance of cheap money kept the markets upbeat; so much so that the following day, the Dow Jones Industrial Average and S&P 500 opened at record highs, and the NASDAQ opened at a 13-year high.
News on a few key economic indicators released last Thursday, the day after the Federal Reserve’s announcement, probably didn’t hurt either, as these indicators suggested the … Read More
Is it an early Christmas present or a really early April Fools’ Day trick?
In a somewhat surprise move, the Federal Reserve decided the U.S. economy was doing well enough that it could start to cut back on its generous $85.0-billion-per-month quantitative easing (QE) strategy.
I say “surprise” because the Federal Reserve initially said it wouldn’t consider tapering until the U.S. economy was on solid, sustainable economic ground, which meant an unemployment rate of 6.5% and inflation of 2.5%. Today, unemployment sits at seven percent and inflation is near historic lows at below one percent.
Against a weak economic backdrop, the Federal Reserve made a brave and daring decision to slash its monthly QE policy by a paltry $10.0 billion. That means that instead of pumping more than $1.0 trillion into the U.S. economy next year, it is only going to inject $900 billion. In other words, the U.S. national debt is going to increase by $900 billion. (Source: Press release, Board of Governors of the Federal Reserve System web site, December 18, 2013.)
If the U.S. economy really was on solid footing, Fed Chairman Ben Bernanke would have made a bigger dent in his monthly bond-buying program. Instead, he made a token gesture as he gets ready to hand the baton to Janet Yellen early next year.
Yup, after injecting $4.0 trillion into the U.S. economy, the country is little (or no) better off than it was before the Fed initiated quantitative easing. U.S. unemployment is down from its Great Recession high of 10% in October 2009, but it has yet to break the seven-percent level. Meanwhile, the underemployment … Read More
The U.S. stock market rally has been on a solid run this year, thanks in large part to the Federal Reserve’s $85.0-billion-per-month quantitative easing policy—well, that and some solid economic indicators. But the question remains: will the momentum continue into 2014?
It all depends on whether or not the U.S. stock market rally follows the laws of physics. For example, when it comes to momentum, an object will continue unless force is applied against it, either a huge amount of force all at once or an applied force over a given period of time. On the other hand, the more momentum something has, the harder it is to stop.
The fuel that has helped propel the U.S. stock market rally over the last number of years could be flickering out. Thanks to better-than-expected employment and retail numbers and strong preliminary gross domestic product (GDP) numbers, many think the Federal Reserve will start to taper its quantitative easing strategy sooner than later.
The end of easy money, some think, could put a cramp in the stock market’s four-year-plus rally—or at least make it run a little more slowly in 2014 than it did in 2013. Whereas the S&P 500 is up roughly 25% year-to-date, analysts think it will grow by as little as six percent and as much as 11% in 2014. This means that the S&P 500 will experience another year of record-highs in 2014, but not quite as bullish as 2013. (Source: “Here’s What 14 Top Wall Street Strategists Are Saying About The Stock Market In 2014,” Business Insider web site, December 13, 2013.)
Those looking to outpace the … Read More
Mortgage rates are on the rise. In November, the 30-year fixed rate mortgage stood at 4.26% compared to 3.35% a year earlier in November 2012. The average rate for the 30-year fixed rate mortgage in 2007 prior to the subprime meltdown was 6.34%, according to data from Freddie Mac. (Source: “30-Year Fixed Mortgage Rates Since 1971,” Freddie Mac web site, last accessed December 13, 2013.)
Much of the decline in mortgage rates was driven by the Federal Reserve’s massive quantitative easing policies that saw the central bank buy $85.0 billion in bonds per month in an effort to drive down lending rates and drive up consumer demand in the housing market.
Yet after adding trillions to the balance sheet of the Fed, the housing market has recovered and is currently on pretty solid ground, with higher demand and prices.
But all of this bond buying will eventually stop and the impact will push mortgage rates higher. Of course, the amount by which bond buying is reduced will be dependent on the economic renewal and jobs market. I do not know how high mortgage rates will rise in one, two, or even five years, but they will move higher as long as the economy and jobs market continue to improve.
The housing market could easily absorb a small rise in mortgage rates, but with the lowest mortgage rates behind us for the time being, I suspect the housing market will inevitably slow down as far as home price increases and sales. This could take a few more years.
With the Fed expected to begin its bond tapering early in the New … Read More
There’s an investment opportunity in the making at one of the eurozone nations for U.S. investors, and it’s becoming more compelling each passing day.
We know the eurozone still burns. The economic slowdown in the common currency region still prevails. We have heard from the European Central Bank (ECB) that it’s still trying to work very hard to break the strength of the economic slowdown. The central bank has lowered the benchmark interest rate and hinted that it might go ahead with a form of quantitative easing. In the past, we also heard the ECB say it will do whatever it takes to save the eurozone.
Sadly, it’s failing.
You see, when the eurozone crisis began, the problems were contained to a limited number of countries, but now we see the economic slowdown spreading through the region; now, the stronger eurozone nations are falling prey to it.
The opportunity? France.
France is the second-biggest economic hub in the eurozone. The economic slowdown in the French economy continues to gain strength. We heard that in the third quarter, the French economy contracted by 0.1%. In the second quarter, it showed growth of 0.5%. (Source: “French economy contracts 0.1 pct in third quarter,” Reuters, November 14, 2013.)
Unemployment in the French economy is also on the rise. In September, the unemployment rate in France reached 11.1%—that’s 3.26 million individuals who were out of work. In October, it declined to 10.9%, but that’s still higher than it was during the same period a year ago. In October of 2012, the unemployment rate in the second-biggest eurozone nation was 10.5%. (Source: “Euro area unemployment … Read More
When it comes to building a balanced portfolio, investors like to find stocks that provide both value and growth. If you’re a value investor, you’re always on the lookout for companies that are cheap relative to their earnings, assets, or price-to-book value; in other words, they look for what’s undervalued.
A growth investor, on the other hand, likes to look at publicly traded companies that are in a position to rapidly increase their revenues and profits; they want stocks with excellent long-term growth potential. This could include those stocks that have provided revenue and earnings guidance that is expected to outperform the market or industry.
While sticking with one strategy over the other can work, it can also lead to lurching gains when your investment strategy hits economic headwinds. However, combining both strategies can produce more consistent returns.
But if profitable investing really was that easy, everyone would be following this investment strategy, which means no one would be making money.
The fact of the matter is that in this economic environment, it’s pretty tough to find unloved, overlooked value and growth stocks. That’s because virtually everything is going up.
The S&P 500 is up 26% year-to-date and 15% since its pre-Great Recession high. Not to be outdone, the Dow Jones Industrial Average is up more than 21% since the beginning of the year and up roughly 13% from its pre-recession high. The NASDAQ is hands down the top performer so far this year, up 30% since January 2 and more than 40% since peaking in 2007.
In a bull market where it seems like everything is going up, it’s … Read More
The central bank of Japan has taken center stage when it comes to using extraordinary measures to revive growth in an economy. In an effort to boost the Japanese economy, the central bank has resorted to quantitative easing. And unlike the U.S. Federal Reserve, Japan is also involved in buying exchange-traded funds (ETFs) and real estate investment trusts (REITs), not just government bonds and mortgage securities.
Unfortunately, the central bank is outright failing. One of the main goals of the Bank of Japan is to inject inflation into the Japanese economy through money printing, aiming for an inflation rate of two percent. Sadly, this isn’t happening; inflation in the Japanese economy is running far below the targeted level, and there may not even be light at the end of the tunnel.
“A 1 percent inflation rate may be possible, but that’s different to the Bank of Japan target,” said Takahiro Mitani, manager of the Government Pension Investment Fund of Japan (GPIF), the world’s largest pension fund. “We haven’t seen real demand to pull prices up yet. Whether inflation will be stable is questionable.” (Source: Winkler, M., “World’s Biggest Pension Fund Sees Japan Fail on 2% Inflation,” Bloomberg web site, December 4, 2013.)
Consumption is one of the factors that can help bring inflation into an economy. Sadly, the Japanese economy is seeing hardships here as well, as consumer confidence, one of the best indicators of where consumer spending will go, is declining. Between September and November, consumer confidence in the Japanese economy declined more than eight percent. The index tracking consumer confidence stood at 45.7 in September and 41.9 in … Read More
A raft of positive economic news came in last week, suggesting that the U.S. economy may actually be getting stronger. On Friday, the Bureau of Labor Statistics reported that the unemployment rate fell from 7.3% to seven percent in November, the non-farm employment numbers improved by 203,000, and unemployment claims fell to 298,000. In addition, preliminary gross domestic product (GDP) growth climbed from 2.8% in October to 3.6%, soaring past the three percent forecast.
Normally, this kind of news would help shore up the stock market and send it rallying higher. But that’s not what happens in a Federal Reserve-fuelled market; in fact, the Dow Jones Industrial Average, S&P 500, and NASDAQ all responded with a losing streak.
Why the fear? Two words: quantitative easing. Since implementing the first round of quantitative easing in 2009, the Federal Reserve has flooded the market with over $3.0 trillion. Quantitative easing has translated into artificially low interest rates. The low-interest-rate environment has also been the primary fuel behind the stock markets’ unprecedented rally.
The Federal Reserve has said it will begin to taper (not discontinue) its quantitative easing strategy when the markets improve, which many believe means an unemployment rate of 6.5% and inflation at 2.5%.
Not surprisingly, the sharp decrease in unemployment has made the markets jittery. Tapering quantitative easing bond purchases means interest rates will increase, which could put a wet blanket on the U.S. economy. Back in May, the Federal Reserve hinted it was thinking about tapering quantitative easing; Wall Street responded by sending the markets lower, and banks responded by sending mortgage rates higher.
So you can see why … Read More
The U.S. housing market is in trouble, and it’s foolish to believe that it’s going to show gains like it did earlier this year and in 2012. More and more evidence is lining up in favor of the housing market in the U.S. economy seeing stagnant growth, or maybe even heading for a downturn.
It is not stressed enough that the housing market depends on home buyers; if they don’t buy, robust growth doesn’t occur.
This phenomenon is currently taking place in the U.S. housing market—the home buyers are shying away. According to the National Association of Realtors, sales for existing (already built) homes declined for the second consecutive month in October. For that month, first-time home buyers only accounted for 28% of the existing home sales in the U.S. housing market. This amount is equal to September and lower than October of 2012, when first-time home buyers made up 31% of all existing home sales. (Source: “October Existing-Home Sales Cool but Low Inventory Drives Prices,” National Association of Realtors web site, November 9, 2013.)
The reason this is happening is because the mortgage rates are continuously increasing. In October, the Freddie Mac 30-year fixed mortgage rate was 4.19%, while this rate was 3.38% a year ago—an increase of 24%.
Sadly, rates are expected to increase further. In a statement, the Federal Reserve implied that it might be moving ahead with the tapering of quantitative easing in the upcoming months, though no date was provided; when we heard something similar in May, we saw an increase in bond yields, which mortgage rates are highly correlated upon. This time will be … Read More
Maybe I’m reading into the economy too much, but the current state of the U.S. economy and Wall Street isn’t adding up. The vast majority of people don’t think we’re in a bubble, including Federal Reserve chair nominee Janet Yellen. Granted, you can only really point to a bubble in retrospect, but still, it certainly looks and feels like we are in one.
Talking before the Senate Banking Committee during her first public appearance as Federal Reserve chair nominee, Janet Yellen said she plans to keep printing $85.0 billion a month and set no timetable for when the Fed will begin to taper.
Truth be told, the Federal Reserve has been, for the most part, pretty straightforward about when it will taper its quantitative easing policy: when the U.S. economy improves. For most, that means an unemployment rate of 6.5% and inflation at 2.5%.
At the same time, other scenarios have been floated about, including no tapering until the unemployment rate hits 5.5%, or better yet, the Federal Reserve begins to taper in early 2014, but continues to keep interest rates artificially low until, by some estimates, 2020. Really, what’s the rush?
And why should they? Since early 2009, the S&P 500 has climbed more than 160% and is up more than 25% year-to-date. The Dow Jones Industrial Average, on the other hand, is up 132% since early 2009 and is up 21.5% year-to-date. And it looks like the good times are going to continue to roll, because, in the words of Janet Yellen, “It could be costly to fail to provide accommodation [to the market].”
Take a few steps … Read More
Are the recent U.S. job numbers a tale of two economies? The Labor Department announced last Friday that U.S. employers added 204,000 jobs in October, beating even the most optimistic estimates.
The U.S. unemployment rate, which is based on a separate survey and counted furloughed federal employees as out of work, rose from 7.2% in September to 7.3% in October.
In a world where good news is bad for investors, stocks fell after the opening bell. Why? Because investors are afraid that better job numbers will prompt the Federal Reserve to start tapering its $85.0-billion-per-month quantitative easing (QE) policy sooner than expected.
But that pessimism may be short-lived. The Federal Reserve has been pretty open about what it will take to start raising interest rates: a strong economy, namely a U.S. unemployment rate near 6.5% and inflation at 2.5%.
There’s no arguing that adding more than 200,000 jobs to the U.S. economy is good news; however, a U.S. unemployment rate of 7.3% is nothing to cheer about, regardless of whether the U.S. unemployment numbers were skewed by the U.S. government shutdown or not. The fact of the matter is that U.S. unemployment needs to drop a lot further before the Federal Reserve reins in its easy money policy and congratulates itself.
Mind you, if the Federal Reserve listens to its own economists, any attempts to taper QE could still be a few years away. While the general opinion is a 6.5% U.S. unemployment rate, at least six Federal Reserve economists think a more realistic U.S. unemployment rate goal should be as low as 5.5%.
With a current unemployment rate of … Read More
It’s as bad as expected, or should I say so far so good? I have been critical about the housing market in the U.S. economy for some time now; I don’t buy the blind optimism that is heard in the mainstream these days, which states the housing market will continue to increase at the rate we have seen in 2012. I stand in the camp that says we are not going to see a crash like the one we saw not too long ago, but at the same time, the increase in the U.S. housing market won’t be as exuberant as we witnessed last year—in fact, we might even see a correction going forward.
It’s not just me saying this; Fitch Ratings also agrees with this notion. According to its U.S. RMBS Sustainable Home Price and Economic Risk Factor Report, home prices in the U.S. housing market are overvalued by 17% as per Fitch’s Sustainable Home Prices (SHP) model. The rating agency said that the U.S. housing market has increased 20% year-over-year; this is the highest growth rate in any time in the last 10 years. (Source: “Fitch: Several U.S. Cities Nearing Bubble-Year Home Price Peaks,” Fitch Ratings web site, November 6, 2013.)
Here’s why the housing market looks to be facing hardships going forward.
The U.S. economy is still in trouble, as the financial crisis has left deep wounds that haven’t healed. If someone doesn’t have enough income to pay for their expenses and they’re relying heavily on government assistance, such as food stamps, would they actively look to buy a home? I don’t think it would be their … Read More
Whether you’re in Pamplona, Spain or on Wall Street, when it comes to running with the bulls, the object is to stay ahead of the pack. This means not getting gouged physically or financially. However, there are an increasingly large number of investors out there right now who think they’ve got a handle on the bull market.
Why? The Federal Reserve says it won’t taper its generous $85.0-billion-per-month quantitative easing policy until the U.S. economy improves. And by that, it means—for now at least—an unemployment rate of 6.5% and an inflation rate of 2.5%.
As a result, the Federal Reserve’s easy money and artificially deflated near-record low interest rates have put the stock market front and center for income-starved investors looking for capital appreciation. As long as the Fed keeps its printing presses in overdrive, there’s no reason to think that the bull market will take a breather.
Case in point: in spite of a year marred with revised lower earnings in the first, second, and third quarters and a record 83.5% of companies issuing negative guidance for the fourth quarter, investors have been flocking with reckless abandon to the S&P 500, which continues to trade near record levels. (Source: “Earnings Insight,” FactSet web site, October 6, 2013.)
For the last week of October, 45% of investors were bullish on the market, down from 49.2% for the week ended October 24—the highest level since February 2011. Month-over-month, the number of market bulls climbed 25%. Over the same period of time, the S&P 500 climbed 4.8%. In the last week of June, just 30.28% of Americans were bullish, representing a four-month … Read More
One of the questions being asked by investors these days is “where’s the inflation?” After the financial crisis and the fall of Lehman Brothers, the Federal Reserve and the U.S. government stepped in to help the financial system. As a result, they promised to print money, and thus quantitative easing was born. Banks received billions of dollars in bailout money.
With this, there was a significant amount of speculation that the increased money supply in the U.S. economy would lead to a period of out-of-control inflation, or hyperinflation.
Fast-forwarding to now, it’s been more than five years since the collapse of Lehman Brothers, but out-of-control inflation has yet to occur. Were those who said there will be hyperinflation wrong? What’s the inflation situation right now?
In August, the Bureau of Labor Statistics reported that the prices in the U.S. economy increased by 0.1%. From January to August, prices increased in the U.S. economy by only one percent. (Source: “Consumer Price Index – All Urban Consumers,” Bureau of Labor Statistics web site, last accessed October 29, 2013.)
Other indicators of inflation ahead signal it’s going to remain dismal as well. For example, I look at the producer price index (PPI) as one of the key indicators of inflation.
In September, the PPI showed that producers in the U.S. economy experienced a deflation of 0.1%. Since the beginning of the year, the inflation in producer prices has only increased by 1.1%. (Source: “Producer Price Index-Commodities,” Bureau of Labor Statistics web site, last accessed October 29, 2013.)
With all this in mind, I stand little different from those who say there will be … Read More
Are the long-term retirement plans of working Americans being held hostage by the Federal Reserve?
If the point of quantitative easing was to stave off a recession and spur jobs growth, I think it’s fair to say the Federal Reserve’s $85.0-billion-per-month money-printing scheme has been a failure. At the very least, I’m not so sure the money was well spent, and that the end does not justify the means.
I enter as evidence almost $4.0 trillion that the Federal Reserve has dumped into the U.S. economy since 2009. To put that into perspective, the average unemployment rate that same year was around 8.5%; that translates into roughly 13.1 million Americans being out of work in 2009. Fast-forward to today, and the unemployment rate stands at an unacceptable 7.2%, or 11.3 million Americans. (Sources: “Civilian Labor Force (CLF16OV),” Federal Reserve Bank of St. Louis Economic Research web site, last accessed October 24, 2013; “The Employment Situation – September 2013,” U.S. Bureau of Labor Statistics web site, October 22, 2013.)
It could be argued that over the last four years, the Federal Reserve has printed off $4.0 trillion to create 1.8 million jobs.
But at what expense? Since the stock market crash in 2008, the Federal Reserve, through its use of quantitative easing, has sent U.S. interest rates towards near-record lows. In fact, the Federal Reserve has kept the federal funds rate target between zero and 0.25% for almost five years.
That’s terrible news for anyone looking to save money, and near-record-low interest rates make it virtually impossible for people to save money to meet their retirement needs. Sadly, for those nearing … Read More
Despite Congress miraculously pulling the U.S. back from the brink of destruction by temporarily raising the debt ceiling and ending the U.S. government shutdown, Americans continue to be a pessimistic bunch. But can you blame us?
According to Gallup’s U.S. Economic Confidence Index, consumer sentiment remains in negative territory. After falling to -39 during the recent standoff in Washington, U.S. economic confidence has improved to -36. To use the term “improved” is being generous; in late May, the index was at -3. (Source: “U.S. Economic Confidence Index [Weekly],” Gallup web site, October 14, 2013.)
While the brinksmanship in Washington is (temporarily) over, our pessimism isn’t. According to another poll, 71% said economic conditions right now are poor, while just 29% said economic conditions are good—the lowest level of the year. Now granted, it takes time for economic confidence to return; following the debt negotiations in 2011, it took economic confidence five months to recover. (Source: Steinhauser, P., “CNN Poll: After shutdown, America is less optimistic about economy,” CNN web site, October 22, 2013.)
Unfortunately, it could be worse this time, thanks in large part to high unemployment and stagnant income and wages. And there’s also the fact that Washington only agreed to fund the government through to January 15, 2014 and extend the debt ceiling through February 7, 2014. Americans can’t get too optimistic about the economy knowing the government is just taking time to reload.
Fortunately, there are economic lands where optimism is blooming in light of real economic change. Economic optimism in the eurozone improved for the fifth straight month and hit a two-year high in September. The … Read More
Bad news on Main Street is good news for Wall Street. Illogical heads prevailed on Tuesday after the U.S. government announced that the unemployment rate dipped to an ever-so-modest 7.2% in September, from 7.3% in August. The U.S. added just 148,000 new jobs in September—far short of the forecasted gain of 180,000 jobs for the month. (Source: “The Employment Situation – September 2013,” Bureau of Labor Statistics web site, October 22, 2013.)
The number of long-term unemployed (those without a job for at least 27 weeks) remains stubbornly high at 4.1 million, and the underemployment rate is at an eye-watering 13.6%, up a sliver from 13.4% in August.
Weak jobs numbers means the Federal Reserve will continue its $85.0-billion-per-month quantitative easing policy into 2014. Those who do not read these pages were apparently surprised last month when the Federal Reserve did what it said it was going to do—namely, keep its stimulus package intact until the economy improves to a 6.5% unemployment rate and a 2.5% inflation rate.
It clearly hasn’t, isn’t, and won’t for the foreseeable future.
Those bad jobs numbers sent the S&P 500 into record intra-day territory. In the week since Congress ended the U.S. government shutdown, raised the debt ceiling, and reported stubbornly high unemployment, the S&P 500 climbed more than three percent. Year-to-date, the S&P 500 is up more than 22%.
That increase is in sharp contrast to anything approaching reality on Wall Street. During the first quarter of 2013, 78% of S&P 500 companies issued negative earnings-per-share (EPS) guidance, 81% during the second quarter, and a record 83% for the third quarter. (Source: “Earnings … Read More
If you listen to mainstream media, the power struggle in Washington is over. The left and right came together valiantly, raising the debt ceiling and ending the U.S. government shutdown. At least, they temporarily did; they basically just put a glow-in-the-dark “SpongeBob SquarePants” band-aid on a compound fracture.
Washington voted to temporarily fund the government through January 15, 2014, and extend the $16.7-trillion debt ceiling through February 7. Then it starts all over again—and if it’s a repeat of the last three weeks, it isn’t going to be pretty.
The self-inflicted U.S. government shutdown, according to one estimate, took at least $24.0 billion out of the U.S. economy; this is after the Federal Reserve reported modest growth in September. (Source: Johnson, L., “Government Shutdown Cost $24 Billion, Standard & Poor’s Says,” Huffington Post web site, October 16, 2013.)
How the January/February deadlines will impact the U.S. and global economy is anyone’s guess in 2014. Or rather, it depends on who you ask; according to the Canadian Imperial Bank of Commerce (CIBC), the global economy is expected to turn a corner in 2014, thanks to economic improvements in the U.S. and Europe. World growth could accelerate more than four percent in 2014, while U.S. growth will climb to 3.2% in 2014 from 1.5% this year. (Source: Quinn, G., “Global economy set to ‘turn a corner’ in 2014, CIBC’s Shenfeld says,” Financial Post web site, October 17, 2013.)
This, of course, is in sharp contrast to the International Monetary Fund (IMF), which said that, as a result of the U.S. government shutdown and slow international expansion, the global economy will grow at … Read More
We’re less than a week away from the perfect economic storm in the U.S., and, based on what others are predicting, just a few short months away from a major 15% stock market correction.
At the beginning of October, almost a million federal employees were furloughed after the U.S. government shut down because it failed to ratify its annual budget. Should the government fail to raise the debt ceiling and therefore default on its loans, that issue will be exacerbated when the debt ceiling deadline arrives.
Failing to raise the debt ceiling will just add to America’s economic woes and put a major dent in the global economy while also undermining America’s credibility on the world stage. While some think a short-term default on the debt ceiling will not cause a major ripple, history is not on their side.
In 1979, the U.S. breached the debt ceiling on about $122 million in bills, but that was blamed on a technical issue related to a new-fangled word processing failure. The glitch caused yields to increase by half a percentage point, where they stayed elevated for months. A default on the debt ceiling this time around couldn’t be blamed on a technical difficulty due to new technology (having a disproportionate ego, however, could be a valid excuse).
Even after the U.S. government shutdown is resolved and the debt ceiling is raised, the U.S. will have suffered a major blow to its credibility. After that, it could go from bad to worse.
According to French banking giant Societe Generale, the S&P 500 will go through a tumultuous correction, even after the debt ceiling … Read More
For the last five years, the U.S. has relied on quantitative easing, one of the most unconventional monetary policies, to kick-start its economy. By printing off trillions of dollars and increasing the money supply on the back of artificially low interest rates, the government is hoping financial institutions will increase lending and liquidity.
Will it work? Not if history is any indication.
On December 29, 1989, during the heyday of the Japanese asset price bubble, the Nikkei Index hit an intraday high of 38,957.44, capping off a decade in which the index soared more than 500%. Despite those dizzying heights, no one could see what the next 25-plus years would bring.
Over the ensuing decade, the Nikkei continued to slide. To shore up the economy, the Bank of Japan held interest rates near zero and had, for many years, claimed quantitative easing was an ineffective measure.
In March 2001, the Bank of Japan unveiled its first round of quantitative easing. It didn’t take, and since then, Japan has initiated 11 rounds of quantitative easing, dumping trillions of dollars into the markets. Instead of stimulating the economy, it has been saddled with a negative real gross domestic product (GDP) growth rate and record-low interest rates.
By late October 2008, the Nikkei hit an intraday low of 7,141—an 80% loss from its 1989 highs. While it rebounded in 2013 and is currently sitting near 14,170, it’s still down more than 63% since the halcyon days of the late 1980s.
After a quarter century, quantitative easing and record-low interest rates are a regular part of Japan’s economic diet. Thanks to uncertainty in the … Read More
The idea of nearly one million U.S. federal employees (read: consumers) being furloughed and not getting paid has sent oil prices tumbling to a three-month low, hovering near $100.00 a barrel.
The reach of the U.S. government shutdown goes well beyond those furloughed; it also affects those who rely on government services. Permitting and leasing for oil and gas drilling is at a halt, with 81% of all employees in the Department of Interior (which encompasses the Bureau of Land Management) on furlough. (Source: Ackerman, A., “Which Government Workers Are Affected by Shutdown?,” Wall Street Journal web site, October 2, 2013.)
Investors are also fearful that even a temporary furlough will dampen an already tepid economic recovery and drive the demand for oil and gas lower. And they should be afraid, as fourth-quarter U.S. growth is projected to decline 0.2 percentage points for every week that the U.S. government shutdown continues.
But that’s only one in a number of factors that are putting pressure on oil prices. On Wednesday, U.S. commercial crude oil inventory numbers came in at 5.5 million barrels, well above the forecasted 2.4 million barrels.
On top of that, improving relations in the Middle East, the resumption of full oil production in Libya, an easing of Western sanctions on crude oil exports from Iran, and a relatively quiet U.S. hurricane season could weigh on oil prices even longer.
However, once the U.S. government shutdown is in the rearview mirror, oil prices should start to recover. But in the meantime, while oil prices are trending lower, the price of some pipeline stocks have been breaking out.
Chart courtesy … Read More
While quantitative easing (QE) may have been put in place to kick-start the economy, it also had the added benefit of kicking income investors to the curb. Since implementing QE1 in November 2008, the Federal Reserve has printed over $3.0 trillion to snap up government bonds.
This has translated into artificially low interest rates, which are supposed to spur borrowing. A low-interest-rate environment has also helped fuel the stock market and put a smoldering spark in the housing market and auto industry. Those same record-low interest rates have also sucked the income out of America’s retirement portfolio.
In a high-interest environment, fixed income assets like Treasuries, bonds, and certificates of deposit are an important part of most retirement portfolios. In theory, they provide regular investors with a stable place to park their retirement money and a means to anticipate a reliable income stream.
In 1980, Treasury bonds peaked at an eye-watering 14%. Today, a 30-year Treasury bond provides a yield of just 3.67%, a far cry from 1980 and a long way from the 5.3% yield in late 2007—before the financial crisis began.
In order to diversify risk, invest in multiple asset classes, and take advantage of growing dividend yields, many investors have turned to exchange-traded funds (ETFs). ETFs are a great option for broad-based investing, especially for those who do not have deep pockets. In fact, with a simple ETF strategy, investors can build a well-diversified portfolio made up of small-, medium-, and large-cap stocks.
While ETFs continue to grow in popularity, investors looking for more options might want to consider exchange-traded notes (ETNs). On the surface, ETNs are … Read More
Federal Reserve Chairman Ben Bernanke has reassured us that his quantitative easing (QE) efforts have been an asset for both Wall Street and Main Street. But for some odd reason, the benefits seem to be trickling upward.
Over the last four years, the S&P 500 has climbed 150%. During the same time frame, the number of Americans receiving food stamps has risen 113% to 47 million, or one-sixth of the American population.
As a broader measure, since the Great Recession began, the top one percent of earners have seen their incomes rise 31.4%, while the bottom 99% saw their earnings rise 0.4%. This translates into the top one percent capturing 95% of the total growth in American wealth during the so-called recovery.
Even those Americans who thought they planned responsibly for retirement have been caught flat-footed. Thanks to QE and artificially low interest rates, the Federal Reserve has taken “income” out of “fixed income” investments and made saving for retirement that much harder.
And with “QE Infinity” in play, it’s not going to get any easier. According to a new global study, one in eight workers say they will never be able to fully retire. It’s worse in the U.S. and the U.K., where the numbers sit at roughly 20%. (Source: “The Future of Retirement: Life after Work?,” HSBC.com, September 2013.)
On top of that, just 51% of American workers say they were “very” or “somewhat” confident that they would have enough money to live comfortably in retirement; in 1995, that number was 72%. That said, 51% actually seems a little optimistic when you consider that 57% of workers say … Read More
Two housing indicators were released earlier this week, and while the numbers seemed divergent, they both really say the same thing—that the U.S. real estate recovery is chugging along, but the current pace is unsustainable.
On Tuesday, a report from S&P/Case-Shiller showed property values in 20 U.S. cities had increased 12.4% year-over-year in July. This marked the largest annual gain since February 2006, when the market was nearing the height of the U.S. housing bubble. (Source: “Home Prices Steadily Rise in July 2013 According to the S&P/Case-Shiller Home Price Indices,” Spice-Indices.com, September 24 2013.)
On top of that, July marked the fourth consecutive month that all 20 cities in the index recorded monthly gains. However, 15 of those cities experienced slower month-over-month gains, suggesting the rate of home price growth may have peaked.
That said, it’s pretty hard to argue we’re in a housing bubble. Since bottoming in March 2012, home prices have rebounded by 21%—but they’re still 22% below their July 2006 pre-Great Recession peak.
Not so coincidentally, mortgage rates have been running in step with the U.S. real estate market and are up more than a full percentage point since May; today, a 30-year fixed mortgage rate averages around 4.5%. Erring on the side of caution, investors sent rates higher as they speculated about whether or not the Federal Reserve would begin to taper its $85.0-billion-per-month quantitative easing program.
Not only has this made borrowing more expensive, but it has also made home ownership less affordable. Those on the cusp have been rushing in from the sidelines to beat the banks’ higher mortgage rates, and in an excited … Read More
Two lines from the song “For What It’s Worth” by Buffalo Springfield pretty much sum up what we are seeing on the key stock indices here in the U.S. economy: “There’s something’ happening’ here/What it is ain’t exactly clear.” There is too much noise out there: some are saying key stock indices are going to head lower, while others are saying they have much more room to the upside.
In the summer, the bears said key stock indices would start to decline in the fall due to markets rallying on low volume. The bulls, on the other hand, insisted that earnings are good and consumers are buying, so a higher stock market is ahead.
From a technical point of view, there’s a particular formation that can be seen on this chart that’s not really talked about in the mainstream—a pattern called the “rising wedge.” According to technical analysts, this is considered a reversal pattern, meaning that it suggests the prices will turn in the opposite direction, heading lower from their current higher standing.
Some of the indications that the rising wedge pattern is in the making are the slowing rate of increase (gains and losses are smaller over time), the ideal three resistances on the upper trend line, at least two supports on the lower trend line, and the volume declining as the pattern emerges.
Please look at the chart of the S&P 500 below.
Chart courtesy of www.StockCharts.com
But this is all too technical. In a nutshell, the fundamentals of key stock indices aren’t getting any rosier. Companies are warning about their earnings, the economy is growing slowly, the … Read More
At 2:00 p.m. on Wednesday, Federal Reserve chairman Ben Bernanke said the central bank would, in the eternal quest for job creation and economic growth, continue to buy $85.0 billion a month in bonds. In other words, its third round of quantitative easing (QE III) is charging ahead unabated.
A few minutes later, The New York Times declared, “In Surprise, Fed Decides Not to Curtail Stimulus Effort.” USA Today proclaimed, “Fed delays taper, surprising markets,” while The Guardian said, “Federal Reserve maintains bond-buying stimulus in surprise move.”
Are economic analysts looking at different data than the rest of us? Back on August 29, I predicted the Federal Reserve wouldn’t begin to taper its quantitative easing until early 2014 at the earliest. That was because all of the economic indicators steering the data dependent on quantitative easing policies were nowhere close to being achieved.
For starters, the Federal Reserve said the unemployment rate “remains elevated.” For the Federal Reserve to begin tapering its QE policy, unemployment would have to fall to 6.5%. In August, the unemployment rate held stubbornly high at 7.3%.
The Federal Reserve also wants the U.S. rate of inflation to rise to two percent; after eight months, it’s stuck at one percent. For the Fed to consider tapering, the rate needs to at least double in just a few months—which isn’t going to happen, especially when you look at stagnant wages. Lastly, a new Federal Reserve chairman will be taking the helm in early 2014; Bernanke isn’t going to want to tarnish his reputation or disrupt the U.S. economy before then.
If the Federal Reserve is as good … Read More
Will the Federal Reserve taper quantitative easing in September? This question has become the main topic of discussion among investors, since reducing or ending quantitative easing can have significant implications on the broader market. By the way, the Federal Open Market Committee (FOMC) meets on September 17 and 18. (Source: “Meeting calendars, statements, and minutes (2008-2014),” Federal Reserve web site, last accessed September 9, 2013.)
It’s no surprise that there is speculation. We are hearing some say the Federal Reserve will start to slow its purchases, and others are saying it won’t. It’s all becoming very confusing, to say the least.
Investors who are looking to invest for the long term need to first evaluate the situation by looking at what we know.
Last year, when the Federal Reserve started buying $85.0 billion worth of mortgage-backed securities (MBS) and government bonds, it said it would continue this operation until the unemployment rate hit 6.5% and the inflation outlook was 2.5%. (Source: “Press Release,” Federal Reserve web site, December 12, 2012.)
Where do we stand on unemployment and inflation?
Unemployment in the U.S. economy has certainly improved—if you look at the numbers on the surface, at least. In August, the jobs market report found that the unemployment rate in the U.S. economy was 7.3%, slightly lower from July, when it was 7.4%. Sadly, this is nowhere close to the Federal Reserve’s target; as a matter of fact, it’s running at more than 12% from its target. (Source: “The Employment Situation — August 2013,” Bureau of Labor Statistics, September 6, 2013.)
According to the data provided by the Bureau of … Read More