Fundamental Market Indicators Every Finance Expert Should Know

Rusty -Tweed

Most people want to make money in the stock and bond markets. The markets provide the preferred investment path for retirement savings, emergency funds, and home down payments. But many would-be investors stay on the sidelines. Having seen the heavy losses imposed by market corrections, they choose to keep their money in the bank.

With low-interest rates and inflation an ever-present reality, leaving money in the bank presents the highest risk of all. Inflation will always devalue cash savings, eventually leaving the saver with severely diminished spending power. Just noting the difference in the cost of housing, vehicles, and everyday items over the last few years demonstrate this truth.

The key to successful investing lies in understanding what moves the stock and bond markets. To gain from market appreciation and guard against losses, investors, both large and small, must actively manage their holdings. When indicators show the markets are primed to stay strong, investors should buy more stocks and consider growth-oriented plays. Signs of deteriorating
conditions should signal investors to sell a portion of their holdings and move the proceeds into cash equivalents. The money remaining in stocks should be kept in safer, more conservative stocks that are known to hold up during economic and market declines.

If calling the market’s direction were easy, we’d all invest like Warren Buffet. While no one can predict all of the market ups and down on a daily basis, investment pros are able to read the overall trends in the market and determine when broad increases and declines are imminent. They key is following the fundamental market indicators and knowing what they mean in terms of market direction. Here are the fundamental market indicators every financial expert should know.

Unemployment Reports

Though no single indicator can determine market direction, if one could, the unemployment situation would be it. Employment underpins the American economy. Since the vast majority of Americans receive most or all of their income from employment, a strong economy and a strong stock market are dependent on a low unemployment rate.

As explained in Investopedia, corporate profits rely on strong employment. When large numbers of Americans are out of work, corporate profits decline. People simply stop making non-essential purchases. When the situation gets bad enough, people stop making essential purchases as well.

Part of predicting the direction in the economy rests on understanding the state of the job market. To aid investors, the government releases two jobs reports each month: the household survey on unemployment and the unemployment insurance claims report. The household survey captures a
broader swathe of the job market because it includes those who are ineligible for unemployment insurance; however, because the jobless claims report has a long historical record, its movements can rely on the show the overall state of the job market.

Inflation indicators

As mentioned, inflation is the enemy of any saver. The goal of any investor is to beat the rate of inflation each year. Inflation also moves the market.

The Federal Reserve’s mission is to promote economic growth while taming inflation. As economies heat up, so does inflation. The government wants growth from productivity, not price increases from inflation. Because of this, the Fed tries to keep inflation in check by altering interest rates. When the economy needs a boost, it lowers interest rates. As inflation takes hold, it ups interest rates.

What the fed does with interest rates moves the markets. Investment pros monitor inflation indicators in order to gauge what the fed will do with interest rates. The Consumer Price Index (CPI) indicates the rate of inflation for consumer goods, while the Producer Price Index (PPI) shows inflation in the cost of making goods. Both reports should be monitored. A rise in PPI usually translates into an increase in the CPI as producers pass on their rising costs to
consumers.

Consumer Confidence

How consumers feel about the economy indicates their spending habits in the coming months. Thus, consumer confidence is a leading market indicator. Markets stay strong when consumer confidence is high. When consumers stop spending, corporate profits fall.

To gauge consumer confidence, watch the Consumer Confidence Index (CCI). When this index falls, a weaker market often follows. Retail sales also provide insight.

The Housing Market

Housing is a giant part of the American economy. Smart investors know that the state of the housing market affects the stock and bond markets. Though housing prices and construction activity vary greatly by region, the overall housing market provides clues into the health of the American economy. By watching the reports on housing starts and building permits each month, investors determine the strength or weakness of the housing market.

Investing is a tricky endeavor. No person can call the direction of the market correctly all the time on a short-term basis; however, knowledgeable investors are able to predict broad, long-term trends. The key is monitoring these key economic indicators.

Interest Rates Worldwide

8.2.2016 | Interest Rates Worldwide – Rusty Tweed team

interest rates worldwide - rusty tweed team

Comparative Worldwide Interest Rates

Despite being at only 1.55%, the U.S. has some of the highest interest rates in the industrialized world. Unless other comparative countries raise their rates, we can’t increase ours.

Only Greece has a higher interest rate at 7.71%. Our closest neighbor below the U.S.’ current rate of 1.55% is the UK at 0.80%. A number of industrialized countries, including Germany, Japan and Switzerland, actually have moved into negative territory.

The prolonged weakness in oil prices continues to keep inflation low worldwide. Many central banks in the industrialized world are expected to loosen monetary policy still further. In China, the central bank may also further cut rates to encourage growth.

There is a lot of talk about raising U.S. interest rates, but the likelihood is that this won’t happen until other countries also raise theirs.

New York Fed president William Dudley’s recent remarks in Indonesia saying caution was needed in raising U.S. interest rates further, make it seem even more unlikely. Dudley’s comments suggested the central bank was leaning towards staying put on rates until at least December, marking one year since it increased rates for the first time in almost a decade.

A rate rise in the U.S., implying a stronger U.S. dollar, would likely depress the values of emerging market currencies. This could have a significant impact on currency turmoil in emerging markets at a time when their economies are already weakening.

The Rise of the Dollar and the Fall of Other Currencies

8 years ago, the Euro peaked at $1.6038 (on 7/15/08).  Last Friday (7/29/16), the Euro closed at $1.1175.  A weaker Euro (i.e. a stronger US dollar) has a negative impact on U.S. exporters. The British pound is at its lowest value since 1985 following Brexit. The U.S. dollar is already strong compared to the Japanese yen.

If the U.S. dollar continues to increase in value and the value of other currencies continue to fall, our goods and services become more expensive for overseas exports. This will likely have a negative effect on the profits of U.S international corporations who depend on overseas sales for revenue. 46% of the revenues of the average S&P 500 company come from foreign sales.

Trade, defined as the combination of U.S. exports and U.S. imports, was $5.02 trillion in 2015, 28% of our $18.16 trillion economy as of 12/31/15. By comparison, in 1995, trade was $1.69 trillion, 22% of our $7.80 trillion economy (as of 12/31/95).

 References:

https://ig.ft.com/sites/when-rates-rise/#faq

http://www.wsj.com/articles/how-u-s-interest-rates-influence-the-world-economy-1450375133

http://www.marketwatch.com/story/why-investors-can-expect-us-interest-rates-to-stay-low-forever-2016-06-07

https://www.theguardian.com/business/2016/aug/01/prospect-of-us-rate-rise-recedes-as-key-fed-voter-urges-caution

Sources:

Standard & Poor’s

U.S. Commerce Department

www.bloomberg.com

Speculation over Next Steps for U.S. Interest Rates

8.1.2016 | Next Steps for U.S. Interest Rates – Rusty Tweed team

Will the Fed Raise Interest Rates in September?

Last week, the Federal Reserve voted 9-1 to keep U.S. interest rates at their current rate. Fed President, Esther George, was the only voice calling for a ¼ point increase in rates.

On the other hand, central bankers seem to be considering the possibility of an increase in September as a result of the improved economy. The FOMC said “the labor market strengthened” and the economy is “expanding at a moderate pace”. The Fed also highlighted the fact that job gains were “strong” in June, and household spending has grown at a brisk clip.

Despite an initial drop in U.S. stocks following the surprise result of UK’s referendum to leave the EU, U.S. stocks have significantly rebounded.

These signs of economic recovery and the expressions of optimism from the Fed could signal a rate hike in September. For now, following the two-day meeting of its policy-making committee, the Fed kept its fed-funds rate unchanged between 0.25 and 0.5%.

What Could Lead to a Raise in Rates?

Gapen and other economists predict that if labor markets continue to improve accompanied by wage growth, the inflation rate is likely to go up. Since the Federal Reserve also control inflation, any significant growth in inflation could also encourage them to increase interest rates.

Overall inflation currently sits at around 1% although core inflation (that excludes energy and food) sits at 2%. Robert Johnson, Director of Economic Analysis at Morningstar, predicted that overall inflation could rise to 2% by December.

Why is a Rate Hike Unlikely?

Most economists remain skeptical about the Fed’s likelihood of raising rates with the November election looming, and the recovery still being somewhat fragile.

The housing market has been acting as a “key driver of the recovery” from the recession, Johnson said. He added it “has been exceptionally sensitive to mortgage rates over the past few years.”

“Even the small hike in December slowed housing sales in January and February,” he said. “Not until the Fed put off another rate hike this spring, causing mortgage rates to fall again, did the housing market start acting better.”

Barclay’s Chief U.S. Economist, Michael Gapen told ABC News that “The Fed believes that the economy will need more monetary support than it normally would. This means that interest rate rises start later, proceed slower and end at a lower level.”

References for Next Steps for U.S. Interest Rates – Rusty Tweed team:

http://www.marketwatch.com/story/fed-holds-rates-steady-but-appears-open-to-september-hike-2016-07-27?siteid=bnbh

http://www.marketwatch.com/story/fed-appears-more-open-to-september-rate-hike-2016-07-27

http://www.multpl.com/10-year-treasury-rate

http://abcnews.go.com/Business/federal-reserve-reluctant-raise-rates/story?id=40919588

House Prices Grow by 5% Over 12 Month Period

7.27.2016 | House Prices Grow by 5% – Rusty Tweed team

House Prices Grow by 5% - Rusty Tweed team

House Prices Spike of 5.2% Over 12 Month Period

TheS&P CoreLogic Case-Shiller survey looks at U.S. house prices in 20 metropolitan areas nationwide. As a result, its home price indices are the leading measures of U.S. residential real estate nationally and in these 20 cities.

It reveals a 5.2% spike of house prices countrywide over a 12 month period. After seasonal adjustment, house prices nationwide dropped by 0.1% in May.

Portland saw the fastest growth in its house prices at 12.5% over the 12 month period, while New York and D.C. are among the weakest areas of the country. Eight cities had more rapid annual price appreciation in May than in April.

Shifting Regional Patterns in House Price Increases

Regional patterns are shifting, according to David Blitzer, managing director of the index committee at S&P Dow Jones Indices. Areas that were previously strong such as Los Angeles, San Diego and San Francisco are seeing more modest rises of 5.4%, 6.4% and 6.5% respectively. Meanwhile, prices in the Pacific Northwest boom. Seattle also saw a significant growth of 10.7% over the 12 month period. New York’s change across the same period was only 2% and Washington D.C. was not far in front with 2.4%.

The 20-city composite is up 40.4% from its lowest point in 2012. It is down 8.8% from its peak in 2006.

House Prices are Historically High Compared to Inflation

In the 12 months ending May, consumer prices increased by only 1%. The disproportionate growth of U.S. home prices to inflation is worth following closely. If the economy doesn’t improve at the same rate as house prices, prices will inevitably begin to decelerate, if not fall.

Robert Brusca, chief economist of FAO Economics, recently pointed out that the trend in house prices has been decelerating despite mortgage rates remaining at record lows. He says house prices look overvalued, therefore “it’s a great time to sell your house”. Brusca pointed out that in the Conference Board consumer confidence report published last Tuesday, expectations for interest rates and inflation declined.

Expectations for higher interest rates in 12 months’ time fell to a three-year low of 51.7% in July from 59.4% in June. The expectation for inflation in 12 months dropped to 4.7%, the lowest rate in more than nine years.

References for House Prices Grow by 5%  – Rusty Tweed team:

http://www.marketwatch.com/story/city-by-city-look-at-us-house-prices-in-may-2016-07-26?siteid=bnbh

http://us.spindices.com/index-family/real-estate/sp-corelogic-case-shiller

http://www.marketwatch.com/story/house-prices-historically-high-compared-to-rent-and-pay-2016-07-26

The Creation of the Federal Reserve System

7.17.2016 | The Creation of the Federal Reserve System – Rusty Tweed team

What factors led to the creation of the Federal Reserve System?

The Panic of 1907

In 1907, a host of factors converged to create “the Panic of 1907, the one that finally persuaded American lawmakers to deal with their country’s backward financial system”, according to Neil Irwin, author of The Alchemists: Three Central Bankers and a World on Fire.

A major earthquake in San Francisco in 1906 led insurers needing access to dollars at the same time, and the banks couldn’t provide them for weeks afterwards; coincided with it being a bumper year for crops, and an economic boom that led to many companies requiring significantly more cash than normal. A huge bank run ensued, the banking system went into crisis mode and the Panic of 1907 sparked one of the worst recessions in U.S. history.

The Need for a Centralized Banking System

The system, as it was, seized up. There were no central bodies from which the banks could take loans. Only a few wealthy bankers like J.P. Morgan, who would extend loans to other banks if possible when trouble loomed.

It was clear the U.S., by now a world power, needed a centralized system of control similar to the types of central banking that had existed in other countries for centuries, such as the Bank of England founded in 1694 or the Riksbank, the central Bank of Sweden, founded in 1668. Despite the immediate opposition, as now, to the idea of government playing a role in banking, 1908 saw the passing of the Aldrich Vreeland Act. The ideas behind the 1908 Act helped form the basis for the Federal Reserve Act signed by Woodrow Wilson in 1913.

The Creation of the Federal Reserve System - Rusty Tweed team

The men who led the newly created Federal Reserve banks, Dec. 23, 1913.
(Photo by Harris & Ewing)

The Creation of the Federal Reserve Board

The Federal Reserve Act aimed to promote maximum employment, fight inflation, and moderate long-term interest rates. In its creation, Congress sought to maintain the stability of the financial system. It also sought to contain systemic risk that may arise in financial markets. Banks and other important institutions became subject to supervision and regulation.

 Despite a great deal of opposition to the idea of centralization, the U.S. had at last its own central bank. New York supplanted London as the center of the global financial system. The dollar replaced the pound as the world’s leading currency.

References for The Creation of the Federal Reserve System – Rusty Tweed team:

https://www.federalreserve.gov/faqs/about_12594.htm

http://www.fool.com/investing/2016/07/14/the-fascinating-history-of-the-federal-reserve.aspx

https://www.washingtonpost.com/news/wonk/wp/2013/12/21/the-federal-reserve-was-created-100-years-ago-this-is-how-it-happened/

When Genius Failed, Roger Lowenstein

The Alchemists, Neil Irwin