Self-driving cars coming to a DMV near you

Testimony from Fed Chair Janet Yellen on the growing risks to the U.S. economy boosted shares in morning trading, partly due to speculation that the Federal Reserve would be forced to delay further interest-rate increases. However, gains faded in later trading, particularly on the Dow. European shares rallied, while Japan’s Nikkei continued its descent, losing another 2.3% following a 5.4% rout yesterday.

The Dow fell 99 points, with 20 of its 30 components retreating; the S&P 500 Index lost less than 1 point; and the Nasdaq gained 14. Advancers led decliners by eight to seven on the NYSE and ran essentially even on the Nasdaq. The prices of Treasuries strengthened. Gold futures fell $4.00 to close at $1,194.60 an ounce, and the price of crude oil declined 49 cents to settle at $27.45 a barrel.

In earnings news:

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Will China’s New Year bring new opportunities?

Stuffed animal monkeys for Chinese New YearLearn about the pluses and minuses of global markets with Chief Portfolio Strategist Dr. Brian Jacobsen.

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Amy George: I’m Amy George, and you are On the Trading DeskSM. In the month and weeks ahead, there are a few big items on investors’ minds. Dr. Brian Jacobsen discusses the pluses and minuses of the markets. Brian, welcome!

Brian Jacobsen: Thanks for having me back.

Amy: What’s the big picture with the big moves in the market lately?

Brian: There is a lot of risk aversion. The dominant narrative seems to be one that the U.S. is going into a recession, which is causing both oil and equity prices to fall. And then on the fixed-income side, there is little sign of inflation. And so when you take risk aversion, add to it low inflation and a poor growth outlook, that equals lower Treasury yields and wider credit spreads. But, that’s the narrative and I think the narrative might be slightly wrong.

I think the recession calls are way overblown. Risks are higher than they were a few months ago, but, I think the probabilities are still pretty low—probably about a 15% chance of a recession within the next six months or so. Low overall interest rates, recent improvements in the Institute for Supply Management’s Manufacturing New Orders Index, the Non-Manufacturing ISM is still above 50, and continued expansion of consumer credit point to economic growth and not to contraction.

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Rebuilding portfolios after a market breakdown

Looking at the stock market through the lens of factors can help investors pinpoint opportunities. Key factors to consider are quality, momentum, value, and size. In this post, we’ll look at what opportunities arise when two of these factors suddenly diverge.

Let’s start with momentum, or Big Mo, which took a big dive last week. In the most recent market turndown, Big Mo got hit hard. This is a big change from the market run-up from November 5, 2012, to July 20, 2015. During that run-up, quality and momentum stocks did very well, but the sweet spot was to be in stocks that were both quality and momentum.

Average stocks' cumulative return in the market run-up, from 11-5-12 to 7-20-15

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Stocks pare earlier losses but still close down

Stocks ended in the red but pared most of the day’s losses by the end of the session. At one point this morning, the Dow was down by triple digits amid concerns over a sell-off in Japan, steep crude-oil price declines, and ongoing worries about Europe’s banking sector.

The Dow lost 12 points, with 16 of its 30 components gaining; the S&P 500 Index slipped by 1 point; and the Nasdaq fell 14. Decliners topped advancers by nine to four on the NYSE and by nine to five on the Nasdaq. The prices of Treasuries strengthened. Gold futures edged up 70 cents to close at $1,198.60 an ounce. The price of crude oil fell almost 6%, or $1.75, settling at $27.94 a barrel.

In earnings news:

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Advice for riding this market’s rocky rebound

Bikers riding down a mountainsideThe S&P 500 Index dropped to an intraday low of 1,812 on January 20. Will that be the lowest of the market’s lows? It’s possible, but there are still risks and plenty of unknowns yet to be resolved. Will China keep successfully propping up its economic growth? Will oil prices stabilize? Will the dollar keep strengthening? Will U.S. manufacturing weakness contaminate service sector strength?

Weak first-quarter earnings could be a threat, although maybe the price declines we’ve seen since S&P’s last peak in November have factored in an anticipation of the weak data rather than a reaction to it. Markets will likely move well before things get resolved. So, investors need to consider the fact that—while waiting in cash positions can be comfortable—it can also be costly if you miss out on buying opportunities.

The market volatility that occurred during a rebound from a correction historically was almost always worse than the volatility that occurred before a correction.

Coming out of the 26 corrections and 9 bear markets we’ve had in the U.S. since 1950, volatility that occurs one month into a rebound (measured by the trailing 20-day standard deviation of S&P 500 Index daily returns) has been approximately 1.8 times the volatility that prevailed before the correction began. For example, the standard deviation of daily returns in the 20 days before the November peak was 0.73%. My calculations suggest we should expect volatility of around 1.3% in the month coming out of the correction. It’s been about 1.27%, so that’s pretty close.

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U.S. stocks follow oil and European shares lower

U.S. stocks followed their European counterparts significantly lower, weighed down by worries about global growth and continued steep declines in oil prices. Stocks clawed back some of their losses in the last hour of trading.

The Dow sank 177 points, with 21 of its 30 components retreating. The S&P 500 Index lost 26, its lowest close since April 2014, with the financials and materials sectors leading the way down. The Nasdaq fell 79 on a generally weak day for tech stocks. Decliners led advancers by four to one on the NYSE and five to two on the Nasdaq. The prices of Treasuries strengthened. Gold futures jumped $40.20 to close at $1,197.90 an ounce. Crude oil sank $1.20 to settle at $29.69 a barrel on continued worries about oversupply and lower demand.

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On volatile days, remember: Sitting on the sidelines can cost you

Manley on the Street“Apparently, you actually have to have a little intelligence to know you’re stupid.” John Cleese

Recent economic statistics and changes in equity earnings expectations both imply deceleration. Things are slowing down and investors don’t like it. I am getting there but the market has been there before me.

I don’t see an economic catastrophe, but the market senses one and is moving to rapidly price it into equities. I still think that this is more like 1953 and 1984 (when stocks rapidly lost 15% to 20% in price as investors took minor moves in the economy and extrapolated them into a repeat of the agonies seen in the then recent past) than a true implosion or explosion in the making. Still, who am I to stand in the way of someone trying to protect their accumulated wealth? “No one ever went broke taking a profit,” to coin a phrase.

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Parmesan bonds: The big cheese of capital markets

Stocks declined as investors considered how today’s jobs report might influence the Federal Reserve’s stance on rate hikes.

The Dow declined 211 points, with 21 of its 30 components retreating; the S&P 500 Index lost 35 points; and the Nasdaq fell 146. Decliners topped advancers by about three to one on the NYSE and by nine to two on the Nasdaq. The prices of Treasuries strengthened. Gold futures edged up 20 cents to close at $1,157.70 an ounce. The price of crude oil fell 83 cents, settling at $30.89 a barrel.

For the week, the Dow ended down 1.6%, the S&P 500 Index lost 3.1%, and the Nasdaq declined by 5.4%.

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Gauging economic health through nontraditional indicators

Weaker-than-expected economic data and earnings reports and a short-lived rebound in crude oil caused the markets to swing back and forth between gains and losses throughout the day.

When everything settled, the Dow gained 79 points, with 19 of its components advancing; the S&P 500 Index added 2; and the Nasdaq was up 5. Advancers outpaced decliners by nine to five on the NYSE and by about three to two on the Nasdaq. Treasury prices strengthened. Gold futures rose $16.20 to close at $1,157.50 an ounce. Crude-oil futures climbed as much as 3% in intraday trading before falling 1.73%, or $0.56, to settle at $31.72 a barrel.

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Addressing concerns of a bear market

Bear looking out of a caveWhat to bear in mind before calling this a bear market. Veteran equity strategist John Manley joins us to explain.

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Todd Crawley: We’re happy to have Mr. John Manley, our chief equity strategist, to talk about addressing the concerns of a bear market. I am Todd Crawley.

Jon Lagerstedt: And I am Jon Lagerstedt.

Todd: And this is The Essential Practice. John, thank you for joining us today.

John Manley: Thanks for having me on; I appreciate it.

Todd: You’ve been around a long time on Wall Street. I know that’s back when they let you start working on Wall Street when you were 12 years old.

John: Heh! Not bad!

Todd: But that’s another story. You’ve seen many slowdowns, accelerations, and business cycles. Maybe you can talk about this one and how it’s similar or not to other cycles.

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