Mad Men… Investors, Not the Show.

By David B. Armstrong, CFA | Apr 08, 2013 | Weekly Market Commentary

Unfortunately I missed posting a blog last week – I had a few things to tie up from the previous week and was not able to get to it in a timely manner.  I’ll be writing a separate end of the quarter overview and will post a link to it in an upcoming blog.

It was a bad week for U.S. economic data, although not quite as alarming as most of the TV discussions that were taking place on Friday.  Last week saw reports of weaker data for employment and unemployment claims. However, there were four significant positives last week:

1. The Bank of Japan made a major stimulus announcement.
2. Gasoline futures plunged almost -25 cents.
3. Italian & Spanish bond yields plunged (meaning people were buying them).
4. Ward’s announced that U.S. vehicle production in the second quarter is scheduled to increase at a +9% (q/q).

Here’s a recap of how the market did last week.

U.S. Employment Data

Last week’s Nonfarm Payrolls report disappointed just about everyone since it only rose +88k in March (meaning 88k new jobs were added), when the number was expected to be around 190k.

The Unemployment Rate fell from 7.7% to 7.6%.  Now on the surface this seems reassuring, but the rate fell because nearly 500k people left the labor force.

This may seem like the reports contradict themselves, but it is because the Nonfarm Payroll data are derived from the “Establishment Survey of Businesses” and the Unemployment Rate is derived from an actual survey of households which is called the “Household Survey.” So yes, fewer folks working combined with even fewer folks looking for work causes the Unemployment Rate to drop.

The only thing really worth mentioning at this point is that the Unemployment Rate is now one tick closer to 6.5%, which is the Fed’s threshold to possibly trigger an increase in the Fed funds rate. However, Bernanke has qualified 6.5% as the ‘target,’ noting it’s not an actual trigger. We’ll see what happens. A lot of times these numbers are revised well after the initial report.  It’s nothing that should prompt changes in anyone’s portfolio.

Stocks & Bonds

Something else worth paying attention to is the relationship between stocks and bonds.  Since the middle of 2012, the yield on the 10-year Treasury has tracked the Standard & Poor’s (S&P) 500 Index up fairly closely (remember, bond yields and bond prices move in opposite directions).  This suggests that as investors grew more optimistic about the economy, and money drifted out of safer assets, like bonds, into riskier assets, such as stocks.

But since the middle of March, a renewed interest in Treasuries took hold and investors started buying them again.  This drives bond prices up and yields down and as such, the yield on the 10-year bond is at its lowest level since early December…even as the broader stock averages have not only held up but continued to go up. (Go refinance your house!)

Some of the Treasury buying occurred amid worries about euro-zone banks and although the Cypriot banking crisis has faded from the front pages, there is still interest in the seemingly less-risky Treasuries.

I think that this is indicating that some investors believe in the idea that we are entering another spring/summer slowdown, Europe is still in a recession, and lingering worries about China are still lurking.  On the other hand, the Federal Reserve continues to flood the economy with new cash, as it purchases $85 billion in Treasury bonds and mortgage-backed securities each month. So with rates on money market funds and CDs at near zero levels, some investors are looking at their real rates of return (applying inflation to their near zero returns and determining that they are actually losing money) and buying risky assets.

It is often said that the best economic indicators to watch are housing and cars…and looking at those, we are still equity fans for the longer term. Be on the lookout for the articles that will be titled “Sell in May and Go Away”…and don’t listen to them.  Especially since the taxes on those gains will be much more expensive to a lot of people this year.

Our opinion remains that investors who are fully invested remain that way and investors with cash positions tactically invest portions of that cash position on any market pullbacks.

Please call or email with questions.

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Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Monument Advisory Group, LLC, a registered investment advisor.  Monument Advisory Group, LLC, and Monument Wealth Management are separate entities from LPL Financial.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Stock investing involves risk including loss of principal. The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries, and widely held by individuals and institutional investors. The Standard & Poor’s 500 Stock Index (S&P 500) is an unmanaged capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The NASDAQ Composite Index measures all domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index. The Russell 2000 Small Stock Index is an unmanaged index generally representative of the 2000 smallest companies in the Russell 3000 Index. The Russell 2000 is an unmanaged index generally comprised of companies with lower price-to-book ratios and lower forecasted growth values.  The 2, 10 and 30 year Treasury is simply the yield at the close of the day.

⁽¹⁾      West Texas Intermediate crude spot price is as of end of week.

⁽²⁾      London Bullion Market Association; gold fixing pricing at 3 p.m. London time.