Wednesday, October 1, 2014

The Fourth Quarter Track Record

Today marks the first day of the fourth quarter, which is generally a good period for investors. According to research from the Bespoke Investment Group, the S&P 500 has averaged a 2.6 percent gain in the final three months of the year since 1928 – which is more than 10 percent on an annualized basis. In that time frame, the fourth quarter has posted a positive performance 72 percent of the time.
These trends have held up in recent years.  Since 2009, the S&P 500 has risen in four out of five fourth quarters, all except for 2012. The S&P 500 has risen by at least 10 percent in three of the past four fourth quarters.
 
This is also a midterm election year, and for whatever reason, stocks have performed even better during fourth quarters of those years. The S&P 500 has averaged a 6.5 percent gain in the final three months of the 21 midterm election years since 1928, and has been positive in 18 of those 21 years.

Tuesday, September 30, 2014

A Strong Third Quarter

The third quarter comes to a conclusion today, and it appears to have been a remarkably broad-based success. According to S&P Capital IQ, all ten sectors in the S&P 500 are expected to record earnings growth for the third quarter. That would be the first time we've seen all ten sectors show earnings growth in three years.

We came close to that mark in the second quarter, when every sector recorded positive earnings growth except for the financials. Nineteen out of twenty possible sectors showing growth over the past six months would still be a signal of a pretty healthy economy.

Which sectors have been the strongest during the third quarter? S&P Capital IQ forecasts that the telecommunications sector will have the highest earnings growth, at 14.8 percent. It's followed be the raw materials sector at 11.6 percent, and health care at 11.1 percent.

Monday, September 29, 2014

Even Better for GDP

The Commerce Department's second estimate of GDP growth for the second quarter was very good, at 4.2 percent. On Friday, it got even better, as the third and final estimate ratcheted that number up to 4.6 percent.

That matches the third quarter of 2011 as the best quarter we've seen for growth since the end of the recession. In fact, we haven't had a better quarter for growth since the first quarter of 2006, when the economy grew at 4.9 percent.

What caused the upward revision? The biggest factor was commercial real estate, which increased by 9.7 percent in the second quarter after rising by just 1.6 percent in the first quarter. In addition, profits recorded by financial corporations rose by $33.3 billion in the second quarter; they had dropped by $86.2 billion in the first quarter.

Friday, September 26, 2014

The Dollar and Inflation

The U.S. dollar has been on a tear lately. Yesterday it reached a four-year high against a basket of global currencies. For the third quarter as a whole, the value of the dollar has risen by more than 6 percent, its best quarterly performance in more than four years.

One benefit of a strong dollar is that it makes imported goods less expensive. Sure enough, in August, the Consumer Price Index dropped by 0.2 percent, after rising at an annual rate of around 1.6 percent each month from April through July. Is the strong dollar the reason?

New research from the Cleveland Fed reports that the relation between the two is not as strong as it might seem. Since 1990, a stronger dollar has indeed made imports less expensive but has had minimal import overall on prices of core goods. So it seems that there are stronger forces on inflation than the strength of the dollar.

Thursday, September 25, 2014

Car Sales Beyond the Recession

We suffered through a subprime crisis in mortgage lending a decade ago, leading to an eventual collapse in housing prices. Now some people are worried that we're undergoing a similar crisis in subprime lending to auto buyers. According to the New York Fed, 23 percent of all car loans are now being made to people with credit scores under 620. Car loans to people whose credit is that poor has roughly doubled since 2010.

But that's mostly an artifact of the tightened lending standards implemented during the recession. If you extend the window back even further, subprime auto lending is still below where it was back in 2006 and 2007, before the recession hit.

Car buying has reached an all-time high, moving at an annual pace of 17.2 million sold in August. That's another artifact of the recession, when people put off buying new cars. The average age of a car on an American road is 11.4 years, up from 9.8 years in 2005.

Wednesday, September 24, 2014

Housing's Long-Term Health

We've been seeing a lot of numbers lately indicating that the economy has returned to pre-recession levels. But for the housing industry, the more relevant time frame is the start of the subprime mortgage crisis, which began around the time housing prices peaked in 2006.

And the sentiment reading from the home building industry that came out last week clearly beat that mark. The NAHB/Wells Fargo Housing Market index reached 59 in September for its fourth consecutive monthly increase - and its highest level since November 2005.

Just about all the indicators were good, according to the National Association of Home Builders. The single home family sales indicator and the single-family sales expectations for the next six months both rose to their highest level in more than a year. Prospective buyer traffic, meanwhile, is at its highest since October 2005.

Tuesday, September 23, 2014

Large vs. Small

It's been in many ways a good year for the stock market. The Dow Jones industrial average is up about 4.5 percent on the year, and the S&P 500 index is up nearly 9 percent. Since those are the two most widely watched indexes, the general outlook for the market has been good in 2014.

But both those indexes focus on large-company stocks. The Russell 2000 index, the prime benchmark for small-cap stocks, is down by 1.4 percent on the year. That means smaller stocks lag their bigger brethren by roughly 10 percentage points.

The last six months have been especially rough for small-cap stocks. The S&P 500 posted its 34th record high of the year last Thursday. But after posting its last record high on March 4, the Russell 2000 has lost 5.1 percent of its value.