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EWM Team

Aug 03
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EWM Monthly Commentary: July-2014

By Uncategorized

Domestic equity markets posted modest losses in July, after having delivered five straight monthly gains. Global turmoil finally caught up with stock prices, as Argentina failed to meet a deadline for a $539 million interest payment, and geopolitical unrest simmered in many parts of the world. On the positive side, economic data continued to trend well, highlighted this week by the first estimate of second quarter gross domestic product (GDP), which came in at +4.0% – a significant improvement over the -2.9% contraction of the first quarter. Employment gains remained robust in July, with 209,000 jobs added. Even though the gain was slightly below forecast, it represented the first time since 1997 that the economy has had six consecutive months of gains of more than 200,000. The unemployment rate ticked up to 6.2%. Geopolitical tensions continue to grab headlines and cause concern among investors.

Within this landscape, stocks were soft for the month. The S&P 500 declined -1.4% for the month, and is now up +5.7% on a year-to-date basis. The Dow Jones Industrials also dropped -1.4%. The tech-heavy Nasdaq Composite Index slid -0.8% as technology stocks continued to post solid relative results. The Russell 2000 Index of small cap stocks significantly under performed the Russell 1000 Index of large cap stocks, with returns of -6.1% and -1.6%, respectively. Growth stocks  fared slightly better than value stocks during the month. In terms of sector performance, telecom services was the strongest performer on a relative basis, gaining +3.7%, while utilities were the poorest performers, posting a decline of -6.8%.

International equity markets were also mostly lower in July, although performance was varied regionally. The MSCI World ex-U.S. Index dropped -1.0% for the month. Emerging markets continued their relative rebound, and outperformed developed markets for the month. The MSCI Emerging Markets Index gained +2.0% for the month. The MSCI EAFE Index, which measures developed markets performance, declined -2.0% for the month. Regionally, China and Pacific ex-Japan were the best performers on a relative basis, with the MSCI China Index and the MSCI Pacific ex-Japan Index gaining +7.3% and +3.7%, respectively. Eastern Europe and Europe were among the poorest performers, with results of -7.8% and -3.8%, respectively.

Fixed-income markets were mostly lower in July, but have still fared relatively well on a year-to-date basis. As has been its custom in every one of its meetings so far this year, the Fed continued its pace of tapering of its asset purchase program during the month, reducing purchases by an additional $10 billion. With this as a backdrop, the benchmark 10-year U.S. Treasury yield ended the month at 2.56%, up four basis points from the 2.52% level of June 30th. Broad-based fixed-income indices were modestly lower in July, with the Barclays U.S. Aggregate Bond Index shedding -0.3% for the month. Global fixed-income markets did not perform as well, with the Barclays Global Aggregate ex-U.S. Index returning -1.4% for the month. Intermediate-term corporate bonds were also lower, as the Barclays U.S. Corporate 5-10 Year Index dropping -0.2%. The Barclays U.S. Corporate High Yield Index posted a loss of -1.3% for the month. Municipals bucked the trend, and posted a gain of +0.2%.

Jul 25
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Which measure of Wage Inflation is optimal?

By Inflation Watch

The Labor Department measures wages and salaries in many different forms:

Each measure has pros and cons when it comes to capturing true wage trends and inflation pressures in the economy. Unit labor costs, for instance, take into account productivity, but growth can be very volatile. The average hourly wage is timely and broad-based, but it can be affected by shifts in employees between high- and low-paying positions.

To find out which best correlates with quarterly core inflation, the J.P. Morgan economists regressed yearly inflation (using the Fed’s preferred measure, the personal consumption expenditure index excluding food and energy) on year-over-year percent changes of the various wage gauges.

The best fit came with the employment cost index. “It would seem the ECI’s strengths outweigh its weaknesses,” they conclude.

(Source: WSJ)

 

Jul 25
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Japan’s consumer inflation slows to 3.3% in June

By Inflation Watch

Japan’s consumer prices rose 3.3 percent in June from a year earlier for the 13th consecutive month of increase, but the pace of increase has been slowing in recent months, government data showed Friday.

The core consumer price index, excluding volatile fresh food prices, stood at 103.4 against the 2010 base of 100, the Ministry of Internal Affairs and Communications said. The figure was in line with private-sector forecasts.

The data have been affected by the consumption tax hike since April. After excluding the direct effect of the tax rise, the inflation rate in June comes to 1.3 percent, according to the Bank of Japan, which aims to achieve a 2 percent rise in or around fiscal 2015 in order to revive the country’s economy.

The nationwide core CPI continued rising, but the pace of rise was slower than 1.4 percent in May and 1.5 percent in April, both without the effects of the tax rise.

Regarding the outlook, the BOJ expects the consumer inflation rate to move around 1.25 percent for some time amid waning upward pressure from import prices, particularly those for energy. But the central bank also says inflationary pressure will continue, partly citing improving domestic demand.

The April 1 tax hike, which raised the rate to 8 percent from 5 percent, is weighing on consumer spending in the country. The BOJ has been cooperating with the government in boosting the economy out of nearly two decades of deflation, introducing in April 2013 aggressive monetary easing measures to achieve the 2 percent inflation goal within around two years.

The apparent slowdown in consumer inflation as confirmed by the latest price data may add to prospects the BOJ will remain committed to keeping its monetary policy sufficiently accommodative. But as the CPI is still moving roughly in line with the bank’s forecasts, it is less likely that the BOJ will immediately take action to additionally ease the policy.

Jul 23
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Headline and Core Inflation in June-2014

By Inflation Watch

The Consumer Price Index rose a seasonally adjusted 0.3% in June. Excluding the often-volatile categories of food and energy, prices rose 0.1% from May.

The year-over-year increase in all prices was 2.1% in June, and prices excluding food and energy slipped to a 1.9% annual gain in June from 2% in May.

A broad rise in prices during May took the annual inflation rate to 2.1%, its highest level since October 2012. But a 3.3% monthly spike in gasoline prices accounted for most of the June increase as motor-vehicle prices fell, prices for medical services were flat and shelter costs rose 0.2%.

Food prices ticked up just 0.1% in June from the prior month after rising 0.5% in May and 0.4% in each of the prior three months. Drought and livestock and crop disease have caused prices for beef, pork, citrus fruits and other groceries to spike this year, driving the annual increase in food prices from 1.1% in January to 2.5% in May. The annual rise in food prices slipped to 2.3% in June.

(Source: BLS and WSJ)

Jul 11
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Macro Overview-June 2014

By Uncategorized

Domestic equity markets posted moderate gains in June, advancing on the strength of many areas of the economy. Even though the final estimate of first quarter gross domestic product (GDP) came in at -2.9% – the largest contraction since 2008 – most segments of the economy have  trended higher in the second quarter. The first quarter GDP data was adversely impacted by the severe winter weather. Employment gains in June were a very robust 288,000, far exceeding consensus expectations. Payrolls now exceed the peak reached prior to the onset of the financial crisis in 2008. The unemployment rate also dipped to 6.1%. In addition, vehicle sales reached the highest annualized level in June since 2006, and the housing market continued to recover after stalling somewhat the prior two quarters as a result of higher mortgage rates. Several geopolitical skirmishes continue to cause some concern among investors.

Within this landscape, stocks posted generally positive results. The S&P 500 rose +2.1% for the month, and has now gained +7.1% on a year-to-date basis. The Dow Jones Industrials gained +0.8%. The tech-heavy Nasdaq Composite Index posted a solid return of +4.0% as technology stocks continued to recover from losses early in the year. In a reversal of the previous few months, the Russell 2000 Index of small cap stocks outperformed the Russell 1000 Index of large cap stocks, with returns of +5.3% and +2.3%, respectively. Value stocks  fared slightly better than growth stocks during the month. In terms of sector performance, energy was the strongest performer on a relative basis, gaining +5.1%, while telecommunications services were the poorest performers, posting a decline of -1.1%.

International equity markets were also mostly higher in June, although performance was not quite as strong as in domestic U.S. markets. The MSCI World ex-U.S. Index gained +1.7% for the month. Emerging markets continued to stage a sharp recovery from  the losses in January, and outperformed developed markets for the month. Investors have digested the impact of the Federal Reserve’s (“Fed”) reduction in asset purchases, and the European Central Bank’s recent move to lower the deposit rate to -0.1% (meaning banks have to pay to keep funds on deposit rather than make loans) has provided stimulus. The MSCI Emerging Markets Index gained +2.7% for the month. The MSCI EAFE Index, which measures developed markets performance, gained+1.0% for the month. Regionally, Japan and Latin America were the best performers on a relative basis, with the MSCI Japan Index and the MSCI EM Latin America Index gaining +5.2% and +4.2%, respectively. Europe and the Pacific region ex-Japan were among the poorest performers, with results of -0.07% and +0.1%, respectively.

Fixed-income markets delivered mixed performance in June, after having posted solid returns for the first five months of the year. As has been its custom in every one of its meetings so far this year, the Fed continued its pace of tapering of its asset purchase program during the month, reducing purchases by an additional $10 billion. The Fed’s meeting minutes indicate that the governors believe the purchases will now end by October. With this as a backdrop, the benchmark 10-year U.S. Treasury yield ended the month at 2.52%, up six basis points from the 2.46% level of May 31st. Broad-based fixed-income indices were little changed in June, with the Barclays U.S. Aggregate Bond Index advancing a mere +0.05% for the month. Global fixed-income markets performed somewhat better, with the Barclays Global Aggregate ex-U.S. Index returning +1.2% for the month. Intermediate-term corporate bonds were modestly higher, as the Barclays U.S. Corporate 5-10 Year Index advanced +0.1%. The Barclays U.S. Corporate High Yield Index posted a gain of +0.8% for the month. Municipals were moderately higher, gaining +0.1%.

Jun 23
Love0

Alternative Investments: A Mystery to Many Affluent Investors

By Alternative Investments

An article from ThinkAdvisor.com titled Many Affluent Investors ‘Have No Idea’ What Alt Investments Mean: Survey, by Melanie Waddell, details results of a recent survey that indicates many investors, despite having an advisor, find themselves unaware of what alternative investments are and whether they are utilizing any.

The survey included investors from the ages of 35-65 with at least $200,000 in investable assets. This target group makes the statistics even more startling because they show that alternative investments are not understood by people likely to incorporate them in their portfolio.

This isn’t surprising news to us. At Endowment Wealth Management, we are committed to understanding our clients’ needs and then help educating them on proper asset allocations to achieve a globally diversified endowment portfolio.

We have built our entire firm on helping clients to better understand their investments.  It starts with our name… Endowment Wealth Management.  We named the firm after our investment philosophy.  The Endowment Investment Philosophy® (EIP) combines three major asset allocations into every client portfolio: Global Equity, Global Income, and Alternative investments.  When combined with our straight talk, using terms that our clients can understand, rather than financial jargon people don’t fully understand, we see their level of engagement rise. For instance, when describing the three asset class buckets that comprise their portfolio, we use a football analogy Equity (offense), Fixed Income (defense) and Alternatives (special teams).  We also designed notepads, which are watermarked with a graphical representation of the 3 dimensional EIP showing how a portfolio will be structured. During our meetings, we use those sheets to breakdown client’s portfolio of traditional and alternative investments according to their goals.  At the end of the meeting, they tear off the note sheet as their primary take-away from the meeting because that’s how they understand the importance of including alternative investments in their portfolio.  People hire us, not just for our professional expertise, but because they also understand our team, our investment philosophy, and where they are going.

If you have an investing question or would like assistance when constructing an endowment portfolio and the importance of using alternative investment allocations, please call our office at 920.785.6010 or contact Rob directly at rob@endowmentwm.com to set up a private, no-obligation wealth consultation.

By Robert Riedl CPA®, CFP®, AWMA

To read Many Affluent Investors ‘Have No Idea’ What Alt Investments Mean: Survey:  http://bit.ly/1nSWKSx

Information presented is for educational purposes only and is not intended as an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies, nor shall it be construed to be the provision of investment advice.  Investments involve risk and unless otherwise stated, are not insured or guaranteed.  Be sure to consult with a qualified financial advisor and/or tax professional before implementing any investment strategies discussed herein.  While the firms are related and share corporate offices, Endowment Wealth Management, Inc. and ETF Model Solutions, LLC are each individually registered as an investment adviser in the State of Wisconsin.   A copy of Endowment Wealth Management’s disclosure      document, Form ADV Brochure Part 2, is available upon request. 

Jun 01
Love0

Bull and Bear Market Durations

By Uncategorized

Bull & Bear Market Durations

 

The above graph shows the bull and bear market durations. The bull market that ended with the financial crisis lasted 61 months, according to Morningstar’s chart, but the two prior runs were 153 months and 155 months long. In other words, stocks were in an uptrend for more than 12 years.

The chart also shows that bear markets are relatively quick, with the last two lasting 16 months and 25 months, respectively.

(Source: Morningstar)

May 31
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Fed’s Favorite Inflation Gauge-PCE Price Index: Headline and Core Remain Below Target, But Rising

By Inflation Watch

The latest Headline PCE price index year-over-year (YoY) rate of 1.62% is a relatively large increase the previous month’s 1.14% (a slight adjustment from 1.15%). The Core PCE index of 1.42% is up from 1.21% the previous month.

The general disinflationary trend in core PCE (the blue line in the charts below) must be quite troubling to the Fed. After years of ZIRP and waves of QE, this closely watched indicator consistently moved in the wrong direction. Since April of last year has hovered in a narrow YoY range of 1.21% to 1.10%, although the April data point has broken above the range. Is this the beginning of a major trend reversal? This will be a closely watched series by the ongoing inflation/deflation debate.

The adjacent thumbnail gives us a close-up of the trend in YoY Core PCE since January 2012. I’ve highlighted the narrow 12-month range that appears to have been breached to the upside in April.

The first chart below shows the monthly year-over-year change in the personal consumption expenditures (PCE) price index since 2000. I’ve also included an overlay of the Core PCE (less Food and Energy) price index, which is Fed’s preferred indicator for gauging inflation. I’ve highlighted 2 to 2.5 percent range. Two percent had generally been understood to be the Fed’s target for core inflation. However, the December 2012 FOMC meeting raised the inflation ceiling to 2.5% for the next year or two while their accommodative measures (low FFR and quantitative easing) are in place.

Click to View
Click for a larger image

I’ve calculated the index data to two decimal points to highlight the change more accurately. It may seem trivial to focus such detail on numbers that will be revised again next month (the three previous months are subject to revision and the annual revision reaches back three years). But core PCE is such a key measure of inflation for the Federal Reserve that precision seems warranted.

For a long-term perspective, here are the same two metrics spanning five decades.

Click to View
Click for a larger image

(Source: Advisor Perspectives)
May 27
Love0

Is this the calm before the storm?

By Uncategorized

CBOE Volatility Index

In the absence of any significant news, and with the Ukrainian situation easing somewhat, market volatility, as measured by the VIX has fallen to a 14 month low. Today VIX is trading just 0.65 above the March 14, 2013 low of 11.05, which was the low reached in this bull market. Many believe that a low VIX, which is sometimes called the “fear index,” indicates investor complacency, suggesting that the market is near its peak. Indeed the VIX hit a low of 9.36 in December 2006, 10 months before the peak of the stock market and the beginning of the greatest bear market in 75 years.

But the ability of the VIX to predict bear markets is spotty at best. The lowest level the VIX has ever reached since it was first computed in the mid 1980s, was 8.89 in December 1993. Although the onset of 1994 was rough because of the unexpected rate increase put in by Fed Chief Alan Greenspan, the secular bull market was still well intact. Another intermediate low for the VIX of 10.00 was reached on March 1995,
but that also did not mark a market peak. In fact the VIX continued to rise in the last five years of the great 1982-2000 bull market which peaked on March 2000.

The Chicago Board Options Exchange Volatility Index, or VIX, is widely considered to be stocks’ “fear gauge.” When things get wild, usually the VIX will increase in value. A portion of the investment community points to this as us being “lulled to sleep by complacency,” and the law of averages will bring us back to more volatile times. However, they may also have simply grown too accustomed to what could turn out to be a brief period in history when volatility was abnormally high. Whatever the case, the S&P 500 has traded in a tight range of only 4.5 percent since March 4, according to the Wall Street Journal. This calmness among stocks has been eerie to some, and surprising to almost everyone.

Is this the calm before the storm? Is Sell-In-May-And-Go-Away going to cause the VIX to go higher?

(Source: WSJ, etc.)