August marched forward with a steady drumbeat of new highs, which was uncharacteristic for the month historically, and therefore a surprise to many investors. The S&P 500 rose 1.9 percent for the month, which included setting fresh records in the final stretch, including the S&P’s 20th record close of the year on Aug. 28. The Dow added 3.2 percent in August, and the Nasdaq gained 1.6 percent. The Nasdaq’s poorer performance was mostly weighed down by profit-taking in the semiconductor sector, after Nvidia’s blowout quarter of AI semiconductor chip sales failed to meet the market’s increasingly lofty expectations. Sometimes good news just isn’t good enough when stocks are priced for perfection.

Speaking of perfection, gold decided to join the party in earnest. The “barbarous relic,” as renowned economist John Maynard Keynes called it, touched $3,533 per ounce on Sept. 2, making fresh all-time highs as investors sought refuge from an increasingly uncertain world. When the 30-year Treasury bond flirts with 5 percent (as it did in early September) and questions swirl about central bank independence, even traditionalists start eyeing alternatives. Gold’s 42 percent year-to-date surge tells you everything you need to know about diminishing confidence in paper currencies, including in the world’s reserve currency, the U.S. dollar.

Never mind that gold pays no dividend, costs money to store, and has historically been a lousy investment over long periods. In uncertain times like these, it’s sometimes about return of capital rather than return on capital. When investors pay up for ballast during an equity rally, one should pay attention.

Under the surface, market breadth improved. Small caps finally showed some spark, with the Russell 2000 up about 7 percent in August, as investors looked for alternatives to the increasing price to earnings multiples of large cap growth stocks. That broadening mattered on days when AI hardware leaders slipped; it kept the tape resilient even as high-expectation names took a breather.

Nevertheless, market leadership still hinged on AI infrastructure. Nvidia’s $4 trillion in market value milestone reached in July set the tone coming into August. The market’s growth pulse held up enough, even as tech leadership wobbled on the last trading day of August.  The backdrop for markets making new highs has been earnings doing the lifting and continued confirmation of massive AI capital spending, not just multiple expansion. Around month-end, however, a mixed read-through from AI-linked earnings began to impact much of the tech sector, resulting in a tech sell-off on the first trading day after the Labor Day weekend. The lesson is as old as the tape: when expectations tower, even good news can be “not good enough.”

Rates, meanwhile, reminded everyone they’re still a main character in the valuation chapter, since they offer investors an alternative to cash and equities. The U.S. 30-year Treasury bond yield pushed toward 5 percent to start September, amid a heavy calendar of new issues to fund deficits and a global bond selloff related to concerns about U.S. Federal Reserve independence. When the long bond flirts with 5 percent, dependable cash flows matter more to traders and investors, and narratives about company growth prospects, less, often resulting in a rotation out of stocks and into bonds. Such a rotation brings money out of equities, lowering their prices, which then results in bond yields coming down, and a cycling back into equities as their returns again look more attractive. All asset classes continue to be fed by years of expansionary fiscal and monetary policies, fueling an excess supply of global liquidity.

The Federal Reserve’s annual late August retreat in Jackson Hole, Wyoming, typically offers global central bankers a chance to pontificate about esoteric monetary policy while enjoying some fly fishing. This year, it turned into political theater. A weaker than previously reported jobs report had led to the unprecedented firing of the head of the Bureau of Labor Statistics. In part due to this revised data, Federal Reserve Chair Jerome Powell signaled that rate cuts might finally be on the horizon, suggesting “the time has come for policy to adjust.” The market loved it, with the S&P jumping 1.5 percent that day. But the celebration was soon tempered by relentless political pressure on the Fed.

Which brings us to the latest elephant in the room: the attempt to remove Fed Governor Lisa Cook. President Trump’s move to fire Cook over unsubstantiated mortgage fraud allegations represents the first such attempt by a president to manipulate the Board of Governors in the Fed’s 111-year history. Cook, for her part, isn’t going quietly. She is suing to keep her job, arguing that unproven allegations don’t constitute “cause” for removal under the Federal Reserve Act. As this column is being written, the matter is tied up in the courts, where it belongs.

The markets have absorbed plenty of political theater this year, but this takes the cake. The Federal Reserve’s independence isn’t just some quaint tradition; it’s the bedrock of a sound global monetary system. Uncertainty about possible political manipulation of the debt markets, interest rates, the value of the U.S. dollar and liquidity caused global investors to start to look for alternative investments to U.S. Treasuries. And nervous markets are volatile markets.

The whole episode reminds one of another axiom: the market hates uncertainty. And in this situation, markets have uncertainty in spades.

With all this drama, you might think it’s time to head for the exits. Not so fast. Yes, we’re in uncharted territory with record valuations, political interference in monetary policy, and geopolitical tensions that would make a Cold War diplomat nervous. But that’s precisely when discipline matters most. The market has climbed a wall of worry for 16 years now, through pandemics, wars, banking crises, and more political drama than Shakespeare could have imagined. Those who stayed the course have been rewarded. Those who tried to time the market based on headlines have mostly been wrong.

The advice in this column remains boringly consistent: maintain a diversified portfolio of quality companies with strong balance sheets and sustainable competitive advantages. Volatile markets always provide opportunities. And don’t let politics drive your investment decisions. Markets do not move in straight lines, but they have rewarded discipline and time invested.

As for gold hitting new highs? Sure, it’s nice to see the gold bugs finally having their day. But remember, over the long term, stocks in growing, cash generating companies have trounced gold by a wide margin.

The road ahead will be bumpy. Between Fed independence under assault, valuations stretched, numerous and growing court challenges to White House edicts and a year of special elections promising more fireworks than the Fourth of July, volatility is virtually guaranteed. But volatility is the price we pay for long-term returns.

Stay invested. Stay diversified. The market will do what it does, regardless of what any of us think about it or politics. Excess global liquidity is still spiking the punch bowl. Our job is to stay the course and take advantage of opportunities when the market serves them up.

William Rutherford is the founder and portfolio manager of Portland-based Rutherford Investment Management. Contact him at 888-755-6546 or wrutherford@rutherfordinvestment.com. Information herein is from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Investment involves risk and may result in losses.

The opinions, beliefs and viewpoints expressed in the preceding commentary are those of the author and do not necessarily reflect the opinions, beliefs and viewpoints of the Daily Journal of Commerce or its editors. Neither the author nor the 91��Ƶ guarantees the accuracy or completeness of any information published herein.

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August 2024 began with a jolt as financial markets grappled with the sudden unwinding of the now widely known “yen carry trade.” This strategy, where investors borrow in low-interest-rate currencies like the Japanese yen to invest in higher-yielding assets elsewhere in the world, had become increasingly prevalent due to Japan’s ultra-low interest rates basically providing “free” money. However, as the Bank of Japan raised rates and the gap between U.S. and Japanese government bond yields narrowed, this trade began to unravel spectacularly.

The rush to cover positions led to a surge in the yen and forced selling across various asset classes, contributing to significant market instability in the early days of the month. The Nikkei, Japan’s market benchmark, declined 27 percent from its July top.

This event served as a stark reminder of the interconnectedness of global markets and the potential ripple effects of leveraged trading strategies. It underscored the need to understand and manage risk in investment portfolios, particularly when it comes to complex strategies involving currency markets. Moreover, it reminded individual investors of the value in staying calm during such market disruptions, as these events often prove temporary.

Despite the early month turbulence, major U.S. stock indexes managed to close August with noteworthy gains. The S&P 500 finished up 2.3 percent for the month, the Dow Jones Industrial Average rose 1.8 percent and the tech-heavy Nasdaq Composite ticked up 0.6 percent. FactSet reported S&P earnings for the second quarter of 2024 up 10.9 percent, which would be the highest year-over-year increase since Q4 2021. Strong earnings reports and positive guidance from many companies in diverse sectors and recurring signs of a resilient consumer continued to fuel stock prices. 

As the dust settled from the yen carry trade upheaval, attention shifted to the labor market. The U.S. Labor Department released a preliminary estimate suggesting that the job market from early 2023 through early 2024 might have been weaker than initially reported. The data indicated that employers might have added 818,000 fewer jobs in the 12 months through March than previously thought. This revision, if confirmed, would mean the economy added around 178,000 jobs a month over that period, as opposed to the current estimate of 246,000 jobs a month.

This revelation came on the heels of July’s unemployment rate rising to 4.3 percent. While still moderate in historical terms, this was its highest level since 2021. The unexpected increase in joblessness, coupled with the potential downward revision in job creation, raised concerns about the overall health of the labor market and its implications for the broader economy. Yet claims for unemployment did not tick up, as might be expected.

Amid market volatility and labor concerns, Fed Chair Jerome Powell’s speech at the annual Economic Policy Symposium in Jackson Hole, Wyoming, became August’s pivotal moment. Powell signaled imminent interest rate cuts, declaring, “The time has come for policy to adjust,” potentially reshaping the financial and economic landscape for the rest of the year.

This pivot toward a more dovish stance reflected the Fed’s growing focus on labor market weakness rather than inflation. Powell’s comments suggested that the central bank is preparing to transition from its aggressive inflation-fighting campaign to a more supportive stance for the labor market and overall economic growth. The speech sparked a rally in both stock and bond markets, with investors interpreting it as a clear indication that rate cuts are imminent.

As August progressed, additional economic data painted a rosy enough picture of the U.S. economy. July’s retail sales rose by a robust 1 percent, blowing past forecasts and indicating continued consumer strength. Meanwhile, the Personal Consumption Expenditures (PCE) price index – which the Fed continues to track closely to monitor inflation – rose 2.5 percent year-over-year in July, meeting expectations. While still above the Fed’s 2 percent target, the figure suggests that inflation has gradually cooled, which should further the case for potential rate cuts.

Looking ahead to September and beyond, investors face a landscape filled with both opportunities and challenges. The August jobs report, set for release on Sept. 6, will be pivotal in determining the Fed’s next move at its Sept. 17-18 meeting. Market expectations are currently split between a 0.25 and 0.50 percentage point rate cut, with further cuts anticipated in the following months.

As we potentially enter a rate-cutting cycle, investors might want to consider how different stocks could be impacted. Historically, sectors such as financials, real estate and utilities have benefited from falling interest rates. However, in all types of markets, it is wise to maintain a well-diversified portfolio across investment sectors and individual companies in order to tamp down market volatility.

While September has historically been a challenging month for stocks, the Fed’s apparent willingness to support the economy could provide a cushion against significant downturns. The pending presidential election provides additional potential ballast. Historically, the party in power continues to prime the economy with fiscal spending in an effort to sway voters. This anticipated stimulus, plus the labor market and inflation, will drive Fed policy and market sentiment in the coming months.

As we reflect on August’s tumultuous journey from volatility to recovery and the return again to volatility on the first trading day of September, it’s important to remember that market fluctuations are a normal part of investing. While the road ahead will continue to have noteworthy bumps, a well-thought-out investment strategy aligned with long-term goals and risk tolerance remains the best approach to navigating an uncertain future. The lessons learned from August will serve investors well – the importance of risk management, the impact of global interconnectedness, the power of central bank policy and the wisdom of investors faced with increasingly long retirement horizons to ignore market gyrations and stay the course.

William Rutherford is the founder and portfolio manager of Portland-based Rutherford Investment Management. Contact him at 888-755-6546 or wrutherford@rutherfordinvestment.com. Information herein is from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Investment involves risk and may result in losses.

The opinions, beliefs and viewpoints expressed in the preceding commentary are those of the author and do not necessarily reflect the opinions, beliefs and viewpoints of the Daily Journal of Commerce or its editors. Neither the author nor the 91��Ƶ guarantees the accuracy or completeness of any information published herein.

The post Defying the dog days: Markets bounce back in August | Opinion appeared first on Daily Journal of Commerce.

Where have we been and where do we go from here?

Where is here and how did we get there?

There is a toxic brew of rising inflation and a slowing economy. It could be called stagflation.

The U.S. economy, guided by Federal Reserve policies, has lurched from one side of the boat to the other. It appears as though the Fed is unable to chart a straight line of growth, so when encouragement is needed, it does too much, and when a slowdown is needed, it also does too much.

The financial crisis of 2007 to 2009 was caused when the Fed, following an easy money policy, overheated the economy. Then, as a result of too much stimulus, inflation predictably followed. A reasonable dose of inflation is OK; the Fed itself has set a target rate of about 2 percent per year. But the Fed overshot their target by a wide margin and inflation slipped the bounds of the Fed and ran wild. We are in a similar, although not yet as extreme, situation today.

Then and now, easy money policy resulted from a desire to have a robust economy. Back then the housing market was stimulated by ultra-loose mortgage lending standards under Fed chairman Alan Greenspan. Variable mortgage rates promised cheap interest rates. Recently the approach was to bring interest rates to near zero, with mortgage rates reaching historic lows. Perhaps, in the background, there was a desire for low interest rates to make the increase in the national debt from the massive fiscal stimulus of the COVID lockdown easier to service.

Whatever the reason the result was cheap money and runaway inflation.

The Russian invasion of Ukraine has exacerbated inflation with logistical bottlenecks caused by the war interrupting supplies and raising the price of oil and food dramatically.

Faced with the recent rise in inflation, the Fed has charted a policy of very high interest rates in an effort to curtail demand and, therefore, economic activity. A recession or even worse could result from these policies. The question is: does the Fed have control of the economy? At the moment, it appears that they do not. The last time something like this was attempted was by Paul Volker, then Fed chairman. Mr. Volker saw runaway inflation and set out to break inflation by raising interest rates. Interest rates rose to a very high number and inflation was halted, but at a terrific cost to the economy. However, as inflation was curbed, the market bottomed and fully recovered its prior peak in just 83 days.

Now, once again faced with inflation, the Fed wants to seriously tighten the money supply and seriously raise interest rates to slow the economy. The result, so far, has been the worst start to a year for the equity market since 1970. Not just equities, but virtually all asset classes have suffered.

The Nasdaq composite is down about 30 percent in the first six months of this year. Individual stocks are worse, in some cases breathtakingly so. Is there any good news here?  It would be accurate to say, there is none. Well, the price earnings ratio of S&P stocks is about 15.4 percent, just a bit below its 15-year average of 15.7 percent, so stocks are cheap right? Could they get cheaper? According to Fact Check, analysts expect that S&P companies will have double-digit earnings growth in the third and fourth quarters of 2022. But other investors are wary, saying that the Fed may have to act even more aggressively if inflation remains high.

Stocks are cheaper than they were, but they may not be cheap.

The Fed says their business is not done, and we can expect more of the same until inflation buckles. Does the economy have to buckle too? Federal Reserve Chairman Powell suggests that he is prepared to see the economy suffer in order to contain inflation. What does that mean for the economy, the markets and households?

Already, models such as the Fed’s Atlanta forecasting model, are pointing to no year-to-year increase in U.S. Gross Domestic Product. Other indicators also suggest difficult times ahead. Since the markets are based on the profitability of companies comprising the markets, an investor can infer that the markets will be under pressure. If the economy suffers another flat or negative growth quarter, we would meet the definition of a recession: two quarters in a row of negative growth. Not until inflation slows and the markets suffer, can we expect any relief from inflation. So, both investors and households will have to tighten their belts. Unless of course the Fed changes course and begins to loosen the money supply, or inflation appears to be losing its grip. Then, depending on how much damage has been done to the economy, one can expect that the economy and markets will resume their upward trajectory.

While markets are down, they have yet to show the panic selling that usually accompanies the end of a bear market. If history repeats itself, we have further down to go.

In the meantime, the wise move is to stay the course, invested in a diversified portfolio of companies with earnings. As one sage investor once said: you make your money in bear markets, you just don’t know it at the time.

Expect a volatile market on the way, but stay the course.

William Rutherford is the founder and portfolio manager of Portland-based Rutherford Investment Management. Contact him at 888-755-6546 or wrutherford@rutherfordinvestment.com. Information herein is from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Investment involves risk and may result in losses.

The opinions, beliefs and viewpoints expressed in the preceding commentary are those of the author and do not necessarily reflect the opinions, beliefs and viewpoints of the Daily Journal of Commerce or its editors. Neither the author nor the 91��Ƶ guarantees the accuracy or completeness of any information published herein.

The post OP-ED: Where do we go from here? appeared first on Daily Journal of Commerce.

The U.S. stock market closed out the first half of 2021 at a record. The market showed gains through July 1 for five consecutive quarters, the longest streak since 2017. Business confidence has rebounded. While it seems that stocks can only go up, the outlook is increasingly hazy.

Fears of inflation cloud the outlook. The Federal Reserve chairman says the inflation threat is transitory, the result of distribution bottlenecks from the resurgence of the economy. Investors are not so sure if the rate of inflation is transitory or more permanent.

Savvy investors are looking for sustainable earnings. Who will be the long-term winners?

The trajectories of value and growth stocks have disconnected. In a bull market, both categories would be moving up. Value stocks have been outperforming growth, indicating that investors are uncertain about market direction.

While corporate earnings have been stellar, many investors believe that the economy’s rebound has been priced in and that stocks, trading at high multiples, are priced to perfection. Stocks are now in the second year of a bull market and can be expected to be choppy and make more muted gains.

Interest rates have risen, as might be expected in inflationary times. The yield on the benchmark 10-year Treasury had been edging up, but then in July fell to its lowest level since February, and may go even lower. Still, rising interest rates could test the downward trend. Rising rates would favor utilities and financials.

The U.S dollar is strengthening, which makes U.S. goods more expensive in international markets and results in difficulties for emerging market countries to repay their U.S. dollar denominated debt.

The Federal Reserve now predicts 2021 U.S. economic growth of over 5 percent, while the International Monetary Fund (IMF) last week raised its expected U.S. GDP growth to 7 percent. The IMF’s optimistic outlook is based on the assumption that much of President Biden’s infrastructure and social spending plans will be enacted. IMF Managing Director Kristalina Georgieva said the two packages would implement many recommendations that the IMF has made for the United States for years, including investments to boost productivity, education and to allow more women to join the American workforce.

“They will add to near-term demand, raising GDP by a cumulative 5.25 percent over 2022 to 2024,” Georgieva said at a news conference, adding that they will also produce a lasting improvement in income and living standards, with a 1 percent increase in GDP output even after 10 years.

In June, nonfarm payrolls increased by 850,000 against a consensus of 680,000. The 3-month average for total nonfarm payrolls increased to 567,000 from 546,000 in May.

The June unemployment rate was 5.9 percent versus a consensus of 5.7 percent, and versus 5.8 percent in May. Persons unemployed for 27 weeks or more accounted for 42.1 percent of the unemployed versus 40.9 percent in May.

Employers, particularly in the service and hospitality sectors, continue to report the inability to fill positions. Many are offering lucrative signing bonuses and are still unable to hire. If state and federal payments to unemployed begin to phase out over the summer months as expected, the hiring picture may improve for these sectors. However, if service companies must pay higher wages to attract and maintain staff, expect that higher prices to the consumer will follow.

The economic recovery is still fragile enough that the Federal Reserve should not be called upon to make shifts in policy.

Similarly, we recommend long-term investors not sway from maintaining a fully invested, well-diversified portfolio.

Information herein is from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Investment involves risk and may result in losses. The opinions, beliefs and viewpoints expressed in the preceding commentary are those of the author and do not necessarily reflect the opinions, beliefs and viewpoints of the Daily Journal of Commerce or its editors. Neither the author nor the 91��Ƶ guarantees the accuracy or completeness of any information published herein.

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U. S. equity markets rose over the course of 2014 as the U.S. economy continued to strengthen. In December the Dow was flat, the S&P was down 0.4 percent, and the NASDAQ was down 1.2 percent. For the year the Dow was up 8 percent and the S&P was up 11 percent – 13.7 percent when dividends were reinvested; the NASDAQ was up 13 percent.

The best sectors among S&P stocks were utilities (up 25 percent), health care (up 24 percent) and information technology (up 19 percent). Energy was the worst performing S&P sector. In late 2014, the S&P finally rose to a new inflation-adjusted high.

Stocks in 2014 as represented by the Russell 3000 were worth 143 percent of gross domestic product, the highest since year end 1999. Increase in household wealth is over $7 trillion over the past three years, according to the Federal Reserve.

Third quarter GDP was revised upward to 5 percent – stronger than expected. Consumer spending rose .06 percent from October to November with the effects of lower prices for gas at the pump taking hold. Oil and natural gas prices both dropped as moderate weather and slowing world economies created a supply glut in those commodities. Crude oil fell to $53.30, the lowest price since May 2009.

Personal income increased .04 percent over October. The strengthening dollar has made investments in the U.S. more attractive. The dollar might well be headed to parity with the euro, where it has not been since 2002.

The only dark spot in the U.S. numbers was that the consumer sentiment declined slightly to 93.6 percent from 93.8 percent in November, according to the University of Michigan consumer sentiment numbers.

The market has weathered another eurozone crisis, the steep drop in oil prices, the end of quantitative easing and the threat of rising interest rates, among other things. The market rise has not been smooth, with a drop of 7.4 percent in early fall and another sell-off of 3.5 percent in December.

The run-up has now lasted nearly 70 months, making it the fourth-longest bull market since World War II.

Bond markets do not share equity market enthusiasm, with declining yields suggesting wariness among investors, even as the Federal Reserve makes plans to raise rates. A rise in yields brings its own worries. A spike in yields in 2013 rattled global markets.

With profits expected to rise about 8 percent in the next 12 months, the markets should see a similar increase in 2015, assuming no change in the price-earnings ratio of stocks. Based on the markets’ current price-earnings ratio of 15.8 times future earnings for the next year, U.S. stocks seem fairly priced.

But profits may not be as strong as they look. Per-share earnings have been increased by share buybacks. Investment in capital expenditures is only a little more than buybacks and dividends. The percentage of buybacks to increased capital expenditures is higher than any year since 2007, which suggests that companies do not have a better use for their money.

As readers of this column know, I often say the market climbs a wall of worry. There is nothing wrong with that as worry keeps a damper on exuberance, which we all know can get out of hand. Just as success breeds success, the strength of the U.S markets compared to the rest of the world and the strength of the dollar has attracted foreign funds.

The U.S. Federal Reserve is poised to raise interest rates in 2015, but they have promised to “be patient.” The decline in oil prices will partially offset the rise in interest rates.

Central bankers all over the world are doing their best to strengthen their economies with little success. European markets have been subdued as fear of deflation takes hold in Europe. The growth rate of European economies has been low, with Eastern Europe especially under duress because of Russian bellicosity. Emerging markets have been under stress too, primarily because of the strengthening dollar and in some cases the fall in oil prices. Because emerging economies often borrow in dollars, they are especially susceptible to a strengthening dollar.

Asian markets have had problems as China’s growth rate has declined. The Chinese central bank has pumped money into the economy, but has not been able to stop the decline in the growth rate. The Chinese property market, which has been robust, is now under pressure and Chinese investors haven’t been looking more to the U.S. as a safe haven for investments.

The recent purchase of the Waldorf Astoria is reminiscent of the Japanese purchase of Rockefeller Center at the height of the Japanese property bubble. A few years later, the Japanese were scrambling to get out of their U.S. investments at a steep discount. The Japanese were propelled into a two-decade recession. Now Japan has entered another recession.

With the growth in U.S. GDP, the resulting increase in profits and the influx of foreign capital, we can expect the U.S. markets to continue their strong run. We can expect rising capital spending, higher dividends and share buybacks. With so much investing feeding the markets and such a positive outlook among investors, one can easily be suspect of the strength of the markets.  Thus we are back to the wall of worry – a good thing.

William Rutherford is the founder and portfolio manager of Portland-based Rutherford Investment Management. Contact him at 888-755-6546 or wrutherford@rutherfordinvestment.com. Information herein is from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Investment involves risk and may result in losses.

The post OP-ED: Bull market climbing a wall of worry appeared first on Daily Journal of Commerce.

The United States economy is strengthening.

November is historically one of the best months in the year for equities, and U.S. equity markets continued their upward trend in November. The broad market index, the S&P, gained 2.48 percent for the month while the Dow gained 2.52 percent.

Consumer prices held steady. The gross domestic product for the third quarter was revised upward from 3.5 percent to 3.9 percent. The GDP growth for the period from April to September was the strongest for a six-month period since 2003. This growth indicates that the U.S. economy is growing into the year-end shopping season. However, consumer confidence slipped from an estimate of 96.5 percent to 88.7 percent. Most of this seems to be because of downbeat job prospects.

Furthermore, the Chicago Purchasing Manager Index showed an unexpected decline of 8.1 percent while the Philadelphia Fed manufacturing index reached its highest level since 1993.

Oil prices continued their decline as oil traded as low as $66 per barrel. Oil prices are down in part because of more output in the United States from fracking, and because of reduced demand and the strong dollar. Oil prices are inversely related to dollar strength or weakness because oil contracts are typically priced in dollars. (There have been brief efforts to price in other currencies, to no avail).

An OPEC meeting to manage the price decline did not produce an agreement because Saudi Arabia said it would not reduce production. Since there is an oversupply of oil in the world combined with softening demand, we can expect the price of oil to continue under pressure.

In the past, Saudi Arabia, which accounts for about 30 percent of oil production, would vary its output depending on prices. However, with the increase in supply from U.S. fracking, which Saudi Arabia sees a threat to its long-term hegemony, it has decided to let prices float down in an effort to break the U.S. frackers. The strategy could be successful – at least against the weaker U.S. producers.

However, other countries are being negatively affected too. Russia claimed that it wasn’t bothered by lower oil prices; however, the ruble fell 11.3 percent against the dollar last week and traded at a record low against the dollar. Venezuela, nearly broke as a country, needs higher prices.

Energy Investment Bank, Tudor, Pickering and Holt said that with oil at $70 a barrel or lower, no basin is safe. Also affected were suppliers such as Schlumberger, railroads such as Union Pacific, and the Canadian rails. Exploration and development will be negatively affected, so capital spending and employment can be expected to decline.

Factors that could cause oil prices to increase would be reduction in production in the Middle East. A severe winter could also influence prices. So, while there are imponderables, the likely scenario is low (in relative terms) oil prices.

Lower oil prices benefit consumers who see their purchasing power increase because of the reduced price of gasoline and heating oil. The drop in oil prices is like a $125 billion-dollar tax cut. Consumer spending has been revised upward to 2.2 percent growth – still a tepid number.

Lower oil prices could help the overall economy too, but the aforementioned consumer confidence numbers along with manufacturing numbers suggest some weakness is ahead. The improved GDP numbers are backward looking.

The stronger dollar is benefiting U.S. equity and fixed-income markets as money from overseas flows to the U.S. both to transfer assets to a stronger currency and because the U.S. economy is growing more than most economies.

Meanwhile, things are not so good for some of our trading partners. Japan has slipped back into recession as higher taxes have slowed its recovery. Prime Minister Abe has called for a snap election to deal with the problems. Abe and the central bank chair, normally friends, find themselves at odds.

China is showing signs of slowing and stress. The Chinese GDP has slowed to 7.3 percent from 11.9 percent in 2010. A high demand for cash because of IPOs and tax payments has raised the cost of borrowing. The Chinese central bank found it necessary to post a note on its website that liquidity in the banking system is ample. Also, the central bank made it easier for banks to loan to small business and agriculture.

The slowing Chinese economy has caused a slowdown in the rest of Asia. Australia has tumbled back into recession because of falling commodity prices owing to reduced Chinese demand. Other Asia economies have suffered too, notably Korea, Indonesia and India.

Europe is still in malaise. Germany has been the only bright spot, but even that glow has dimmed. The rest of Europe is in a funk. Fears of deflation haunt European central banks as consumer prices are at their lowest rate of increase this year. Only the U.K. is showing signs of life.

Russia and Ukraine still cast a pall over Eastern Europe, with Putin on his mission to make Russia a superpower again. Emerging markets are lackluster too.

We now head into December – historically the best month for U.S. equity markets. We expect the markets to do fine through the end of the year and into January; by then we will have a better picture of economic growth.

We will remain fully invested in a well-diversified portfolio.

William Rutherford is the founder and portfolio manager of Portland-based Rutherford Investment Management. Contact him at 888-755-6546 or wrutherford@rutherfordinvestment.com. Information herein is from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Investment involves risk and may result in losses.

The post OP-ED: Market continues upward march appeared first on Daily Journal of Commerce.

In my previous column, I predicted that September and October would be volatile months. In October, the S&P 500 slid to a low of 1,820, temporarily erasing all of this year’s gains. The market volatility index soared 51 percent in just eight days. At its low, the S&P was down 9.1 percent from the beginning of the month. The S&P crossed below its 200-day moving average.

Fears of a slowdown in China, deflation in Europe, plus Ebola fed the market decline. Additionally, the Fed decided to end its quantitative easing program, but suggested that low interest rates might continue “for a considerable time.” Encouraged by a supportive Fed, the market began its ascent.

In its statement, the Fed took credit for “solid job gains” and a falling unemployment rate. It said that a range of labor market indicators suggest that labor market slack is “gradually diminishing.” In the process it struck from its statement an earlier assessment that “labor market slack was substantial” – a phrase investors have been watching closely for signs that the Fed was becoming more confident about the economy.

Of course, one of the reasons that the unemployment rate has fallen is that the participation rate (those looking for work) has fallen to multiyear lows. Furthermore, real median household income has fallen six years in a row and is at its lowest level since 1996. However, during this time transfer payments and other government programs, funded by massive fiscal stimulus in the form of U.S. government debt, has kept consumer confidence robust.

Twice before, Fed officials declared that the Fed would stop bond buying, only to restart the effort later when growth, hiring and inflation appeared to sag. The Fed’s rate assurance included a new qualifier: “If the job market improves more quickly than expected or inflation rises, rate hikes could come sooner.”

No doubt the Fed’s aggressive bond buying program saved the country from an ugly depression, but we have remained mired in a slow growth economy far too long. The tepid growth was not solely the fault of the Federal Reserve, which should get credit that the economy was not worse. The blame for the slow growth economy lies squarely with the government’s executive and legislative branches, which did all they could to impede growth by placing unprecedented new burdens on business and job creation.

Oil stocks continued their decline as the price of a barrel of oil declined. The four largest airlines, which had been on an uptrend, but had their ascent interrupted by Ebola fears, resumed their rise and ended October up on average 55.6 percent year to date.

The markets were buoyed by good earnings reports, with 75 percent exceeding estimates and earnings up 9.6 percent, which was better than expected. Earnings were accompanied by strong guidance regarding future earnings. Consumer confidence increased to 89.6 percent and new home sales also helped.

Gross domestic Product for the second quarter was revised upward to 3.5 percent from 3.1. The volatility index declined. The dollar strengthened.

Japan announced its own version of quantitative easing, which caused global markets to jump. Investors, who just weeks before couldn’t wait to get out of the market, became buyers. The S&P finished the month of October up 2.3 percent and up 10.8 percent from its October lows, gaining that ground in just 14 days.

During the month, the Dow and the S&P traded at all-time highs, and the NASDAQ traded at its highest total in 14 years. The market ended the month just six basis points off its yearly highs. “Sell in May and go away” did not work for the second year in a row, as the market increased 7.1 percent between May 1 and Nov. 1. Lesson learned: Stay fully invested with a long-term point of view in a well-diversified portfolio.

Déjà vu: Our old friend Alan Greenspan reappeared right before Halloween with a recommendation to buy gold. Consistent with his past forecast record, the price of gold dropped 5 percent in the next few days.

William Rutherford is the founder and portfolio manager of Portland-based Rutherford Investment Management. Contact him at 888-755-6546 or wrutherford@rutherfordinvestment.com. Information herein is from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Investment involves risk and may result in losses.

The post OP-ED: Markets continue their volatile ways appeared first on Daily Journal of Commerce.

In my September column, I warned that September (and October) could be down months, with a correction of 5-7 percent possible. I thought that this pullback should be used as a buying opportunity. September and October are frequently volatile. The market lived up to expectations with September seeing wide market swings: Six days had over 100 point changes and one day had more than 200. The volatility index rose from 36 percent. The market in September saw the S&P drop by 1.4 percent.

October is often a scary month, and not just because of Halloween. Since 1929, the S&P has risen or fallen 6 percent or more on 91 occasions. Twenty-five of those changes have occurred in the month of October.

At the beginning of the financial crisis in 2008, the market had five moves of 6 percent or more, with moves up of 10.8 percent and 11.6 percent in a day, and down moves of 9 percent, 7.6 percent and 6.1 percent all in a day. In October 2008, in spite of the volatility, the market ended up 8.6 percent. History suggests that October could be a volatile month.

Many global concerns fed September’s pullback. China’s growth appeared to slow. The umbrella revolution unfolded in Hong Kong. Europe, with woes exacerbated by Ukraine, slid closer to recession and deflation. Ebola threatened to spread. Only the U.S. economy seemed to expand.

The expansion in the U.S. economy led American investors to fear that the Federal Reserve might raise interest rates sooner rather than later. This fear was a negative for the markets, but positive for the dollar. The dollar has strengthened against major currencies.

Dollar strengthening has in turn worried the markets, as investors thought that U.S. exports would be less competitive, thereby slowing the U.S, economy. The strengthening dollar attracted more investment into the U.S., particularly into fixed income, which of course put downward pressure on interest rates. This downward pressure gave the Federal Reserve more leeway to raise interest rates.

The strengthening dollar meant that oil prices fell, which is a real plus for the economy (and a headache for Mr. Putin). Other commodities fell too, in part because of the slowing Chinese economy. These falling prices led to fear of deflation. So, you see, up is down and down is up. It is enough to give investors headaches.

In general, the strengthening dollar will be a net plus for the U.S. In past periods when the dollar has strengthened, the market has risen. The reason is not a cause and effect, but a coincident indicator. The dollar strengthens because the U.S. economy is stronger relative to other economies. Similarly, interest rate increases are often accompanied by a market rise, because interest rates tend to go up when the economy is stronger and sometimes are thought of as a leading indicator of equity markets. Of course, the talking heads sensationalize these trends to instill fear, because it attracts listeners, stirs up interest, and makes viewers hungry for more. It sells newspapers too.

On the other side of all the negative news is the growth in the U.S. economy – 4.6 percent in the second quarter of this year. Unemployment fell to 5.9 percent, a six-year low. The rate of unemployment was helped, however, by the fact that even fewer people were participating in the labor force. The labor force participation rate fell to 62.7 percent, as more and more people opted out of work and into the transfer payment way of life. Cursory observation shows that there is no shortage of jobs, but rather people who want them or are qualified for them. Eventually the shortage of workers will put upward pressure on wages, which are now growing at about a 3 percent annual rate.

Housing, one of the mainstays of the economy, has been erratic: Existing home sales are down, but new home sales are increasing. One of the drags on home sales has been the inability of people to get a bank loan. Recent government regulations have deterred home loans, and some small banks have exited the market.

Even seemingly qualified borrowers, such as Ben Bernanke, have had difficulty getting a loan. It has been reported that Mr. Bernanke, former Federal Reserve chairman, was turned down for a home equity line of credit. The reasons are unclear, given that he has a million-dollar deal for his book on his time at the Fed, receives speaking fees in the six figure range, and has a good, steady job. However, he did recently change jobs – always a red flag with the robo underwriters today.

In general, I believe that, in spite of our government’s impediments, the weakness in the European economy, the threats from Mr. Putin, Hong Kong, Ebola, and ISIS, and the slowing growth (to 6-7 percent) of the Chinese economy, the U.S. is still, relative to others, the best place to invest. With cash returning next to nothing and fixed income under pressure from rising interest rates, equities still appear to be the most attractive asset class.

Wise investors will use this pullback for investment opportunities. Warren Buffett stated recently that times like these are when he likes to invest. The market seemed to hear him with a strong rise just after he made his statement. Noted investor Shelby Davis has said, “You make most of your money in a bear market; you just don’t realize it at the time.”

William Rutherford is the founder and portfolio manager of Portland-based Rutherford Investment Management. Contact him at 888-755-6546 or wrutherford@rutherfordinvestment.com. Information herein is from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Investment involves risk and may result in losses.

The post OP-ED: Volatile September market is true to form appeared first on Daily Journal of Commerce.

Since April 2009, the last market bottom, U.S. equity markets have marched upward, increasing 172 percent through Aug. 31. For over five years, the market has been hitting new highs, on average every 14 days. But throughout this time, bears have called the end of the market rise; forecasts of doom have come regularly.

The bears have been on the wrong side of the market. This bull market has been hated and untrusted all the way. Yet once again it arrived at new highs. In August the market was up 3.8 percent. It is the first time this year that the market has been up all four weeks in one month.

So, is this the top? Will the market fall 30 percent, as some people have predicted? And what about the headline issues of Syria, ISIS and Ukraine?

The markets have continued their upward trend because of the healing process that has taken place since the credit market crash. The crash did not occur because of “irrational exuberance.” It occurred because of the work of financial miscreants who peddled mispriced financial paper to investors throughout the world.

The collapse occurred when “the music stopped playing” and there were no bigger suckers. It collapsed when the government refused to bail out Lehman Brothers, which was the linchpin, if not the culprit, in the whole scheme of things. With the collapse of Lehman Brothers came the collapse of the financial system and the credit markets (see my warnings about this during interviews on CNBC on the floor of the New York Stock Exchange in 2007 and 2008.)

After this collapse, the U.S. Federal Reserve found it necessary to backstop and then support the U.S. economy. The rest of the world had to follow suit.

As a result of the Fed efforts, the U.S. financial markets were restructured, and the economy gradually corrected itself. Europe and Japan, in the meantime, have not done so well. The markets saw this correction and began to recover. Institutional investors understood what was happening, but many retail investors did not; hence, they stayed on the sidelines to their detriment.

Gold bugs and bears bet against the U.S. economy and markets. However, it is wise to remember the saying “don’t fight the Fed.” That was certainly true in this case, as the economy and markets began their long recovery, now over five years old.

Five years is certainly a long bull market historically, so we must be near the end. But is the end imminent? At Rutherford Investment, we don’t think so. However, we are probably closer to the end than the beginning.

We have been predicting that 2014 would be positive for the markets even after the approximate 30 percent rise for equity markets in 2013. The markets have done even better than we thought. And why wouldn’t they, with a 4.2 percent GDP rise in the second quarter of this year? Such a strong showing supports a strong market.

Companies, which have wrung the most productivity possible from their physical plants and personnel, are starting to invest more. With capacity utilization at nearly 80 percent – usually a time that requires capital investment – companies are starting to invest their huge cash troves.

Furthermore, some of the plants are probably obsolete, so utilization might be even higher. Companies have started to hire. Temporary help firms, usually the first to signal hiring, are feeling the effect. Help wanted signs abound, even as the labor force participation rate has dropped.

Barron’s seems to think that people have grown accustomed to not working and have figured out how to stay unemployed and survive. (See Barron’s Sept. 1, 2014 issue). New hiring and scarcity of labor will push up hourly earnings, as companies have to bid more for workers. This will raise family incomes.

What about the correction? We think that September and October will be (slightly) down months. A correction of 5-7 percent could be in the offing, but should be viewed as a buying opportunity. After the elections in November, whichever party wins, we should see a sprint to the tape (end of the year) and even beyond. Use these opportunities wisely.

Of course, headline news could rattle markets, but the underlying economy is still in a recovery mode. President Putin knows that President Obama does not want to take any action that might increase the conflict in Ukraine before the election; so, at the moment Putin has Obama pinned to the mat. We’ll see if Obama can escape from this hold, and gain a reversal, after November.

William Rutherford is the founder and portfolio manager of Portland-based Rutherford Investment Management. Contact him at 888-755-6546 or wrutherford@rutherfordinvestment.com. Information herein is from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Investment involves risk and may result in losses.

The post OP-ED: Rodney Dangerfield market reaches new highs appeared first on Daily Journal of Commerce.

In the second quarter of this year, U.S. equity markets returned 5.2 percent, as measured by the Standard and Poor’s 500 indexes, and outperformed most other developed markets.

This was the sixth straight quarter of positive returns posted by the S&P 500 through June 30, 2014. Because of growing turbulence in the Middle East, the prices of energy stocks were bid up. U.S. Growth and Value stocks posted identical returns at 4.9 percent. Commercial property real estate investment trusts posted stellar returns of 7.1 percent, the 17th consecutive quarter in the black.

However on the last day of July, the Dow Jones industrial average dropped 1.9 percent. After weeks of complacency, the volatility index spiked up, although not to alarming levels. For the past several years, these spikes in the volatility index have been followed by market rallies.

This past bull market has been a lesson in “don’t fight the Federal Reserve.” With central banks throughout the world working to support the economy, it would not be wise to bet against them. For the past several years those who have bet against the Fed and the equity market have lost.

That the equity market has taken a breather should be no surprise. The gloom-and-doom prognosticators have been predicting a market crash for years. A stopped clock is right twice a day. However, the markets marched steadily upward, much to the distress of the doomsayers.

Now they can say, “I told you so,” but it is not doom yet. Nor is it likely to be. For instance, David J. Kostin, strategist for Goldman Sachs Group, sees a strong divergence between the equity and bond markets in the years ahead. He expects the S&P 500 to gain 8 percent over the next 12 months. By the beginning of 2018, he sees the S&P 500 at about 19 percent above current levels. He expects the 10-year Treasury note to return just 1 percent during that time.

The revised numbers for gross domestic product for the second quarter of this year show the economy growing at 4 percent in a rebound from the negative numbers of the first quarter. More than 200,000 new jobs were created for the sixth month in a row. While unemployment rose from 6.1 percent to 6.2 percent, it appears that more people who had been sitting on the sideline are re-entering the improving job market.

Profit growth in this earnings season is a credible 7.5 percent so far, with 74 percent of firms beating street estimates. The purchasing manager’s index for the U.S. showed a gain of 58.7 at the end of July, stronger than the expected 56.5 percent. Personal spending remained steady, rising at 0.4 percent in June. Corporations are carrying lots of cash on their balance sheets, which could yet be deployed.

The U.S. is now producing more oil than either Russia or Saudi Arabia, with our production growing. We can do even more.
Weighing on the markets were headline events surrounding Ukraine and the Israel Hamas conflict. Additional reasons for the downturn in the markets were a) the extended period of the run up;  b) new highs were reached, but they were highs on tepid volume;  c)The markets began to look frothy. A talk of bubbles was common. Even Federal Reserve Chairwoman Janet Yellen called out “extended valuations in the social media sector.” An unwritten rule of Fed leadership has been to not comment directly on the market and say nothing that will move the markets. Her testimony was reminiscent of Alan Greenspan’s admonition to get variable interest rate mortgages while interest rates were attractive. It is not clear what Yellen’s bonafides are on stock selection. Greenspan’s recommendation did not end well.

A recent spate of initial public offerings also suggested we were nearing a market peak, as these new IPOs pulled money out of existing equity holdings. Since the money was withdrawn from larger and more liquid equities, which were often in an index, and the new IPOS were not in an index, the indexes were pressured down. Additionally, because the economy seems to be getting on a more-sound footing, expectations of an interest rate increase – earlier, rather than later – intensified. The Federal Reserve would not be raising interest rates unless it thought the economy was improving. Rising interest rates will make for a stronger dollar, which is already happening. A strong dollar is good for the U.S., as oil will become cheaper (because oil contracts are typically priced in dollars), and a strong dollar will attract capital to the U.S. An increase in interest rates would be good for bank stocks, and banks are typically a leader in the markets.

The rest of the economy does not appear to justify the downturn. It may just have been fatigue with the headlines and the record highs. Normally at this time in the election cycle, the government – regardless of which party is in power – will bring out the check book. That may not be possible in today’s more overextended government. Nevertheless, the economy should be able to lumber on, and the markets should reach new highs before year end.

William Rutherford is the founder and portfolio manager of Portland-based Rutherford Investment Management. Contact him at 888-755-6546 or wrutherford@rutherfordinvestment.com. Information herein is from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Investment involves risk and may result in losses.

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