The National Debt is currently: $19,117,639,132,587.00 is Higher by another 8 BILLION in the last week. The interest pay-out alone on the debt is 233 Billion per year! I post this so we will be aware of what we are leaving to our children.
Last Wednesday, on March 9, 2016, the bull market officially celebrated its seventh birthday. During that seven-year period, the S&P 500 nearly tripled, gaining 194% in price and producing a total return of 241%. Despite all of the time that has passed, memories of the stock market collapse in 2008 and 2009 remain vivid for all of us. Set up by the severe 2008 – 09 decline, this bull market has been one of the strongest in history. My question is; Why? I would say the biggest driver of gains in the current Bull market has been Federal Reserve (Fed) policy. Monetary policy stimulus, including quantitative easing (QE) and the so-called ZIRP (zero interest rate policy), has played a Huge role in powering this bull.
Think about it; if the Fed isn’t raising rates because the economy isn’t strong enough, shouldn’t the stock market fall? Stocks have historically done quite well after the Fed starts rising interest rates. Why would companies like lower rates better than a booming economy? Because their borrowing cost is next to nothing and when you have lower expenses, your earnings look better.
Folks, Wall Street firms will never tell you they think the market is poised for a fall. They want you invested in stocks and other assets. It’s how they make $$$. Even in a bear market (2008-20010) they will tell you “everything’s going to be alright”. While a Financial Advisor at Merrill Lynch (14yrs) I was reprimanded for telling clients to go to cash. They said it was “timing the Market” and not allowed. This is one of the many reasons I left that business.
As I stated last week, we’ve been stuck in the current “growth” pattern for the last 7 years. An average real gross domestic product, GDP, (the output of goods and services produced by labor and property located in the United States) growth rate of about 1.88% (2009 thru 2015) is not growth, but treading water. The highest we’ve gotten is 3.00% back in 2010. Prior to this recent time period we averaged about 3.5% growth.
The Dow is higher by 91 points today/Friday and the highest of the year. The Dow is at 17,573. The S&P 500 is trading at 2,045. Gold is trading at $1,254 an ounce, while oil futures at $39.52 a barrel. Gas prices, (Regular in El Dorado Hills, Costco, AM/PM), are at $2.29/Gal. Summer gas (higher priced) is in production.
The FNMA 30-year fixed 3.0% coupon (interest rates at which banks sell their loans into Fannie Mae), containing 3.25% – 3.625% mortgage rates, the benchmark or how rate sheets are priced these days is currently trading at 102.06. We tested the support (lower) end of the trading range last week. Our current trading range is about 101.25 to about 102.8. Each .50 change in the price of the security translates to about 0.125 in rate. Basically the change in the price of the security translates to the price (or points paid or credited) of the mortgage rate. The higher the number (price), the lower the rate.
In economic news this week; Stocks rose again today, putting major indexes on pace for their fifth straight week of gains. The week’s advance accelerated after the Fed on Wednesday signaled a more gradual path of interest-rate increases. The Dow, which has risen each day this week, is up 2.1% so far this week. The S&P 500 has added 1.2%.
The Federal Reserve held their scheduled meeting this week and held interest rates steady along with signaling it will lift them more slowly than previously indicated because of a weak global environment and volatile stock market. The Fed said in a statement that they decided to leave the central bank’s benchmark interest rate in a range of 0.25%-0.5%. The decision was widely expected.
The big change was in the Fed’s so-called “dot plot,” where officials penciled in only two quarter-point hikes this year, down from four in December. “We continue to see risks,” Fed Chairwoman Janet Yellen said in a press conference after top officials met. But she also pointed out that “the U.S. economy has been very resilient in recent months.”
Just a few months ago, the Fed appeared ready to embark on a series of interest-rate increases after determining the economy was strong enough to handle it. Yet big losses in the stock market early in the year, slowing U.S. growth and fresh worries the global economy spurred the Fed to back off. See last week commentary regarding the Fed backing itself into a corner where rates are concerned. Financial markets now don’t expect a rate hike before June and rallied on the news.
More recently our economy seems to have stabilized, easing some of the Fed’s concerns. The Fed pointed to improved consumer spending, a stronger housing market and “strong job gains.” Yet the Fed acknowledged that exports and business investment remain soft. Inflation is expected to remain on the low side this year, even though there are some signs that price pressures are building. The Fed predicted its preferred PCE inflation gauge will end 2016 at 1.2%, down from a prior forecast of 1.6%. The bank wants to see inflation rise to the 2% level it considers a sign of a healthier economy.
Other Central Banks adjusted their rates this week: Norway’s central bank cut its main interest rate as it sought to boost a slowing economy and keep prices rising close to its 2.5% target. Indonesia’s central bank cut interest rates for the third time this year to offer more support for the domestic economy. The South African Reserve Bank raised its key interest rate to 7.0%, from 6.75% previously, citing the threat that a weakening currency poses to inflation.
U.S. wholesale prices fell 0.2% in February to mark the fifth decline in seven months, largely because of lower gasoline and food prices. The price of goods dropped 0.6% last month. Wholesale gas prices sank 15% and food declined 0.3%. The cost of services was flat. Over the past year overall producer prices are flat in unadjusted terms. Excluding the volatile categories of food, energy and trade, core prices edged up 0.1% in February. Core wholesale prices have risen 0.9% in the same span, the biggest 12-month increase since last summer. While some pressure appears to be building, inflation is still very low.
Consumer prices also fell in February as well owing to another drop in gasoline, but the rising cost of shelter and medical care is creating upward pressure on underlying inflation. The consumer price index declined 0.2% last month, the Commerce Department said Wednesday. Energy prices dropped 6% last month, mostly because of cheaper gasoline. The price of food, however, moved up 0.2% as the cost of groceries rose for the first time since last fall. Over the past 12 months the CPI has risen at a mild 1% rate. That’s down from 1.4% in January. Yet stripping out food and energy, so-called core prices rose 0.3% in February. Core consumer prices have climbed at a 2.3% annual rate, the fastest pace since May 2012.
Sales at U.S. retailers dipped in February after an even bigger drop in January, a sign that consumers haven’t ramped up spending despite steady job creation. Retail sales fell 0.1% last month, the Commerce Department said Tuesday. And sales for January were revised lower to show a 0.4% decline instead of a 0.2% gain. Retail sales account for about 25% of consumer spending, the main engine of economic growth. The lackluster pace of sales in the first two months could mean another tepid increase in gross domestic product, GDP, in the first quarter. The economy expanded at a weak 1% annual clip in the fourth quarter and was projected to accelerate to a 2.3% rate in early 2016.
A measure used to help determine GDP, known as core retail sales, was unchanged in February. Core sales strip out gas, autos, building materials and grocery stores. Core sales have risen a scant 1.1% in the past three months. The retail sales figures, however, do not take inflation into account. Cheap gas, falling import prices and a recent decline in the cost of food have helped Americans to stretch their paychecks. Real consumer spending is therefore stronger than retail sales suggest.
A measure of U.S. leading economic indicators rose in February for the first time in three months and suggests steady if mild growth in the months ahead. The leading economic index rose 0.1% to 123.2 last month, according to the nonprofit Conference Board. “Although the LEI’s six-month growth rate has moderated considerably in recent months, the outlook remains positive with little chance of a downturn in the near-term,” said Ataman Ozyildirim, an economist at the board that produces the report. A separate index of current conditions rose 0.1% in February. The LEI is a weighted gauge of 10 indicators designed to signal business-cycle peaks and valleys.
U.S. consumer sentiment slipped to 90.0 in March from 91.7 in February, the lowest reading in five months, because of concerns about how fast the economy will grow in the months ahead as well as the expectation that gasoline prices will rise. “While consumers do not anticipate a recession, they no longer expect the economy to outperform the 2.4% rate of economic growth recorded in the past two years,” said Richard Curtin, chief economist of the survey. The last time the index was as low as it is now was in October. The sentiment index reached a post-recession peak of 98.1 in January 2015 but has averaged 92 since then. The all-time high for the sentiment index is 112, set in January 2000. The index hasn’t topped 100 since 2004.
On the Real Estate front: Confidence among home builders held steady in March, an industry group reported Tuesday, even as another issued a call for more housing construction. Construction on new houses rose in February to a five-month high, led by the biggest increase in single-family units in nine years. Sales of existing homes hit the second-highest rate of the expansion in January, the National Association of Realtors said last month. Houses sold at such a strong pace that inventory fell to one of the lowest levels in decades, pushing prices ever higher.
On Tuesday, NAR released a survey showing demand for homeownership was still strong. The vast majority, 82%, of current homeowners surveyed said now is a good time to buy. The survey also demonstrated what NAR calls “an overwhelming consumer preference for single-family homes in suburban areas.” In a release, NAR Chief Economist Lawrence Yun said that “supply and demand imbalances and unhealthy levels of price growth in several metro areas have made buying an affordable home an onerous task for far too many first-time buyers and middle-class families.”
On the Employment front: The number of Americans who applied for unemployment benefits last week rose by 7,000 to 265,000, but the rate of layoffs taking place in the economy are still exceedingly low.
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