US Economic News

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PINION Jun 18 2015 at 8:40 AM Updated Jun 18 2015 at 11:39 AM
US Federal Reserve's Janet Yellen braces for sharemarket volatility

US Federal Reserve chairwoman Janet Yellen appears to have steeled herself for an outbreak of volatility when US interest rates are finally nudged higher.


Janet Yellen: "It is hard to have great confidence in predicting what the market reaction will be to Fed decisions and there have been surprises in the past." AP


by Karen Maley
US central bank boss Janet Yellen appears to have steeled herself for an outbreak of market volatility when US interest rates are finally nudged higher, even though she continues to reassure investors that rate rises would be gradual.

In her press conference on Wednesday night, Yellen seemed to shrug her shoulders when asked about the impact of rising US interest rates – which the US Federal Reserve has kept close to zero since 2008.

"It is hard to have great confidence in predicting what the market reaction will be to Fed decisions and there have been surprises in the past," she said.

She also conceded that the US central bank had erred in not raising rates faster in the early 2000s, saying that "with the benefit of hindsight it might have been better to raise rates more rapidly or more during the 2004 to 2006 cycle".

Although it kept short-term interest rates unchanged overnight, the US Federal Reserve signalled that it would start to raise rates as soon as September, as the US economy appears to be picking up pace following a sharp slowdown in the first quarter.

Even though the US central bank's decision to keep short-term rates on hold was widely expected, the US dollar dipped in its wake, as it encourages investors to keep buying higher-yielding investments in countries such as Australia.

By raising interest rates the US central bank would appease critics who argue that by keeping interest rates artificially low, the bank has pushed investors into riskier and less liquid investments, which has led to massive overvaluation in equity and bond markets.

AT ODDS WITH THE IMF

But it would put the US central bank at odds with the International Monetary Fund, which last week urged the Fed to wait until next year to raise rates, warning of the consequences for the rest of the world as investors pull their money out of emerging markets and start buying higher-yielding US assets.

At her press conference overnight, Yellen obliquely addressed the IMF's concerns, saying the US central bank would try to minimise the impact of its decision on other countries.

But she stressed that the Fed's decision would be dictated by what happened in the US economy.

She noted that the US central bank had not decided the right timing for an interest rate increase, saying policy markets still wanted to see more "decisive" evidence of the strength of the recovery before deciding to raise rates, while continuing to stress that rate moves would be gradual when they began.

All the same, she said that if US economic activity picked up in the second half of the year, while the unemployment rate continued to improve "certainly an increase this year is possible".

At the same time, Yellen is far too sophisticated a central banker to spell out the precise economic conditions the US central bank would need to see before it raised rates.

"It would be wrong for me to provide you a road map that was as simple as 'if the unemployment rate declines to x'," she said. Yellen noted that a range of factors needed to be considered, including the pace of job creation, the labour force participation rate, and the level of wage inflation.

She also pointed to the potential disruption if Greece was unable to reach a deal with its creditors and avoid default.

Although she noted that the US had little direct trade or financial exposure to Greece, "there would undoubtedly be spillovers to the United States that would affect our outlook as well".

Fairfax Media Australia

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Market warns: US not strong enough
918 words
20 Jun 2015
The Australian Financial Review
AFNR
English
Copyright 2015. Fairfax Media Management Pty Limited.

Is the US central bank like an invalid desperate to prove that it is able to finally quit the sick bed, even though doctors warn that the effort could cause a relapse?

That's the view of many market players, including the legendary bond investor Bill Gross, who last September abruptly left giant bond fund manager PIMCO (a firm he co-founded in 1971) to join its competitor Janus Capital.

In the Barron's 2015 midyear roundtable, Gross argues that the US Federal Reserve "will bump up its interest rate target" this year, most likely in September or December.

The Fed, he says, "wants to prove that, like a sick patient, it can get out of bed and stand up".

Gross points out that by keeping US interest rates close to zero since 2008, the US central bank has created problems for major parts of the financial system.

"Zero interest rates are nice for borrowers, but they have a negative effect on pension funds, insurance companies and liability-based financial organisations," he says.

Certainly, US central bank head Janet Yellen appears to be continuing to lay the groundwork for a rise in short-term US interest rates as soon as September.

Speaking after a meeting of the US central bank's key interest rate committee, Yellen was at pains to stress that policymakers wanted to see more "decisive" evidence of a strengthening economic recovery before raising interest rates, and emphasised that rate rises would be gradual.

All the same, she noted that if US economic activity picked up in the second half of the year and the US jobs market continued to strengthen, "an increase this year is possible".

The US central bank's deputy head, Stanley Fischer, has made little secret of the Fed's desire to return to a more normal interest rate policy.

"Beginning the normalisation of policy will be a significant step towards the restoration of the economy's normal dynamics, allowing monetary policy to respond to shocks without recourse to unconventional tools," he noted in a speech in New York in March. He reminded his audience that the path back to normal interest rates would be a long one, and there was no reason for investors to be unduly concerned because US monetary policy would continue to be supportive.

"When we raise the interest rate," he said, "we will be moving from an ultra-expansionary monetary policy to an extremely expansionary monetary policy."

For her part, Yellen also appeared to be steeling herself for a possible outbreak of market volatility when the Fed raises interest rates, despite her painstaking efforts to prepare investors for such an eventuality.

"It is hard to have great confidence in predicting what the market reaction will be to Fed decisions and there have been surprises in the past," she said this week.

Yellen also concedes the US central bank had erred in not raising rates faster in the early 2000s. "With the benefit of hindsight, it might have been better to raise rates more rapidly or more during the 2004 to 2006 cycle," she said.

By raising interest rates, the US central bank would appease critics who argue that by keeping interest rates artificially low for so long, the bank has pushed investors into making highly risky investments, which has pushed valuations in global equity and bond markets to extreme levels.

But it would put the US central bank at odds with the International Monetary Fund, which earlier this month urged the Fed to wait until next year to raise short-term interest rates.

In its annual review of the US economy, the IMF argued that the Fed could be forced into an embarrassing reversal of monetary policy if it cut rates prematurely.

"Raising rates too soon could trigger a greater than expected tightening of financial conditions or a bout of financial instability, causing the economy to stall," the IMF report said. "This would likely force the Fed to reverse direction, moving rates back down towards zero with potential costs to credibility."

Investors worry that US interest rate rises are likely to reverberate through the global economy, as money is pulled out of emerging markets and used to buy higher-yielding US assets. A Fed rate rise could also push the US dollar sharply higher, hitting borrowers in emerging markets that have large US dollar-denominated debts.

But while most investors are resigned to a US interest rate rise in September or December, some - such as high-profile US bond trader Jeffrey Gundlach, who heads the bond firm DoubleLine Capital - believe the patient is still far to weak to quit the sick bed.

Speaking to investors on a conference call earlier this month, Gundlach predicted that relatively anaemic growth and low inflation meant the Fed would take longer to raise rates than the consensus is expecting. (The weakness in the US economy in the first quarter has caused the Fed to cut back its 2015 growth forecast to 1.8 to 2 per cent, from 2.3 to 2.7 per cent previously.)

And he offered an interesting explanation for the Fed's continued warnings to investors that higher rates were on the way.

"I'm wondering why the Fed is so interested in talking about raising interest rates," he said. "My conclusion is they just don't want to be at zero. When the next economic weakness comes, it's a real problem if the Fed is at zero."


Fairfax Media Management Pty Limited

Document AFNR000020150619eb6k0002a

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Jun 25 2015 at 7:14 AM Updated 28 mins ago
Goldman's Cohn says investors aren't ready for US rate rise


Goldman Sachs president Gary Cohn ... "It won't at all be surprising to me if there are some interesting market reactions based on official change in rate policy by the Fed." Louise Kennerley
by Michael J. Moore

Years of discussing when and how the Federal Reserve will raise interest rates probably isn't going to prevent market participants from being caught off guard, Goldman Sachs Group president Gary Cohn said.

"We're probably less ready than people think," Cohn said on a podcast posted Wednesday on the firm's website. "It won't at all be surprising to me if there are some interesting market reactions based on official change in rate policy by the Fed."

Economists estimate the US central bank will begin raising its benchmark target in September after more than six years of near-zero rates. Cohn cited quantitative easing in the US and Europe as examples of macroeconomic events that were long expected and still caused market swings when announced.

"When it does happen, it's usually not the first- derivative event that people are caught off guard by," Cohn said. "They're caught off guard by the second-, third- and fourth-derivative events. It's 'Oh yeah, when interest rates go up, that happens.'"

Goldman Sachs, one of the largest global trading banks, posted a 12 per cent jump in fixed-income revenue in the first three months of the year. Chief financial officer Harvey Schwartz said that period "was dominated by one primary theme, central bank policies."

Most corporate clients have already taken advantage of low interest rates by issuing debt and raising capital, Cohn said.

STEADILY FIRMING ECONOMY

A steadily firming US economy could encourage the Federal Reserve to raise interest rates later this year.

On Wednesday the Commerce Department reported that gross domestic product contracted in the first quarter at a 0.2 per cent annual rate - less than previously estimated.

Growth has since rebounded as the temporary drag from unusually heavy snowfalls and disruptions at West Coast ports dispute faded and estimates for the second quarter are currently between a 2.0 per cent and 3.0 per cent rate.

On Tuesday, Federal Reserve governor Jerome Powell said he saw a 50-50 chance the US economy will improve enough for him to support an interest-rate increase in September, with a second move to follow in December.

Investors see a roughly 50 per cent chance the Fed will lift off in September, according to bets in interest-rate futures markets. Remarks by chair Janet Yellen at a press conference last week after the Federal Open Market Committee met suggested to some economists she favours delaying to December.

The FOMC signalled that recovering growth would probably warrant raising rates later this year, though the pace of subsequent increases is likely to be gradual.

with wires

Bloomberg

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• OPINION

• Jun 25 2015 at 1:21 PM

• Updated Jun 25 2015 at 2:29 PM
The data no investor can afford to ignore

It all hinges on the strength of US economic data. Rocco Fazzari


by Philip Baker
Gary Cohn, the second in charge at investment bank Goldman Sachs, has provided investors with an important reminder of one thing they should never ignore – the economy.
With so many market-focused metrics that investors must monitor, plain old economic data can seem a bit prosaic.
But Cohn surprised a few investors when he said in a podcast that despite all the talk and warnings of rising interest rates in the US, it was still going to cause all sorts of problems in financial markets when it eventually happens.
And for that reason, it's reports like the one on Wednesday night that showed the US economy is rebounding faster than what most economists thought following a few months of cold weather, that should be a must-read for all investors.
The US Federal Reserve has made it very clear that if the data is good they will hike rates.
For sure, the latest revised number for the first quarter shows the US economy still contracted. But it wasn't as bad as first thought after that cold snap.
Instead of shrinking by almost 1 per cent it contracted by just 0.2 per cent thanks to better retail spending that accounts for 70 per cent of the entire economy. Economists have been expecting some better retail numbers as a result of all the jobs that have been created, but have been disappointed with the lack of follow-through.
Maybe now consumers are starting to spend.
BUSINESS INVESTMENT ON THE RISE
Also compelling was the upward revision to business investment. Companies are showing signs of investing in their businesses that suggest the second-quarter GDP numbers will be good.
If it all goes to plan that weakness investors witnessed in the first quarter will be shrugged off as just a passing phase.
Indeed, just a few weeks ago most economists were thinking that for the second quarter, which finishes on Tuesday, the US economy would be lucky to be growing at a 2 per cent pace.
But now their Excel spreadsheets have got a growth rate of up to 3 per cent thanks to new home sales that this week reached their highest level since 2008.
A 2 per cent growth rate is now closer to the bottom of the range.
The latest upgrade, or revision, to first-quarter gross domestic product numbers comes hot on the heels of encouraging trade data and new car sales for May, that showed drivers in the US bought almost 18 million cars, the most in close to 10 years.
One area of the US economy that hasn't been a problem is the jobs market. Indeed, the US is on the cusp of chalking up the longest streak of creating jobs on record.
That all adds up to rates rising sooner than later.
And yet experts like Cohn said in a podcast that: "We're probably less ready than people think."
If the upbeat data keeps on coming, rates could rise as early as September, although according to the latest betting on futures contracts linked to the timing of a rate hike, traders see a move in September as close to a 50 per cent chance.
Cohn said that it could take time for a lot of people to realise and understand the knock-on effects of higher rates, but also said that a lot of corporate clients had locked-in the benefits of lower rates by issuing debt and raising capital.

[CityFarmer]

The September rate hike is almost the prediction by most market player. The next focus should be on how fast the rate hike...

Fed's Dudley says September rate hike 'very much in play': FT

NEW YORK - A September interest rate hike is "very much in play" if the U.S. economy continues to strengthen, though the Federal Reserve could also wait until December to start tightening policy, an influential Fed official said in a newspaper interview.
...
http://www.todayonline.com/business/feds...ch-play-ft

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Can the Fed afford zero interest rates?
Economy John Kehoe AFR correspondent
691 words
4 Jul 2015
The Australian Financial Review
AFNR
English
Copyright 2015. Fairfax Media Management Pty Limited.

The drop in the United States unemployment rate to a seven-year low of 5.3 per cent leaves economists, investors and Fed watchers with a doozy of a conundrum entering the July 4 Independence Day long weekend: how low can the jobless rate fall before stoking higher inflation that would risk the Federal Reserve falling behind the curve on raising interest rates?

It is virtually unprecedented to see the Fed funds rate anchored around zero, with unemployment almost touching the Fed's proxy for the non-accelerating inflation rate of unemployment. Fed officials estimate the unemployment rate's long-run range is 5 per cent 5.2 per cent.

Yet financial markets and economists generally reacted dovishly to the official US payroll figures published on Thursday, which showed a solid 223,000 non-farm jobs were created in June. The result was marginally softer than the median forecast of 233,000.

Three million jobs were created last year and the economy is on track to add a further three million this year.

The prior two months' job gains were revised down by a total of 60,000 to 254,000 in May and to 187,000 in April - still respectable enough figures indicating an improving economy.

The cool response was partly attributable to persistent weak wages. Annual wage growth fell to 2 per cent from 2.3 per cent, contrasting with other recent wage measures showing acceleration.

"Traditionally, the continued decline in the unemployment rate would be associated with a lift in average hourly earnings," says Wells Fargo Securities chief economist John Silvia. "However, this cycle is clearly different," he said.

The 0.2 of a percentage point drop in the jobless rate from 5.5 per cent in May, would normally suggest the labour market is tightening and inject impetus for rate rises.

But Bank of America Merrill Lynch economist Michelle Meyer noted the decline was "for all the wrong reasons".

Economists looked through the headline jobless figure to the main reason why unemployment fell: a drop in the number of people looking for work. The labour force shrank by 432,000 people in June.

The participation rate of 62.6 per cent dived to its lowest since 1977. Male participation slumped to an all-time low. The explanation behind why so many Americans are giving up looking for work will help determine how much "slack" remains in the labour market and how much longer Fed chair Janet Yellen can put off increasing rates.

The decline in workforce participation may be primarily structural, driven by an ageing population retiring.

Or it may be mainly cyclical, caused by deterred jobseekers scarred from the recession giving up on job hunting.

If the participation rate slump is temporary (cyclical) and picks up as people gain more confidence to look for work as the economy improves, there remains spare capacity in the labour market. This scenario would give the Fed more breathing space before raising borrowing costs.

Yet if the decline is more permanent (structural), the US economy is already dangerously close to full employment at zero interest rates. If this is the case, inflation pressures will build sooner for the Fed.

Macquarie Capital analysts believe full employment is "around the corner" because the decline in participation was "driven by retirements, not workers who may return to the labour force in the future".

"Many commentators are likely to dismiss the decline in the unemployment rate as due to a decline in participation that should reverse," Macquarie says. "We disagree and see [it] as predominantly structural."

Either way, if the unemployment rate continues to fall, economists say wages will have to pick up as the fight for scarcer labour between employers becomes more competitive.

Most economists tip the central bank will begin raising rates in September, though interest rate traders favour a December tightening.

Wages and labour participation in the coming weeks will prove crucial.

Key pointsFalling unemployment figures will give economists some anxious moments.

The decline could be due to older workers retiring but it raises fears on interest rates.


Fairfax Media Management Pty Limited

Document AFNR000020150703eb7400013

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GG will be very surprised that the expected Sept or 3Q US rate hike remains on track... or perhaps a token 0.25% in view of the ongoing global financial turmoil...

US Fed signals caution on rates
DOW JONES JULY 09, 2015 7:58AM

Fed chair Janet Yellen: officials were worried at its June 16-17 meeting about Greece and US consumer spending. Source: AFP
Worries about global turbulence and soft spots in the domestic economy weighed on US Federal Reserve officials when they gathered at their June policy meeting, trepidations that could cause them to wait longer before raising short-term interest rates increases in the months ahead.

“While participants generally saw the risks to their projections of economic activity and the labour market as balanced, they gave a number of reasons to be cautious in assessing the outlook,” the Fed said in minutes of its June 16-17 policy meeting, released with its regular three-week lag.

Among those worries, the minutes noted, were “uncertainty about whether Greece and its official creditors would reach an agreement and about the likely pace of economic growth abroad, particularly in China and other emerging market economies.” They also expressed concern about the slow pace of US consumer spending.

Since that meeting, Greece has defaulted on a loan from the International Monetary Fund and China’s stock market has descended into a tailspin, developments that are likely to intensify the Fed’s caution.

Fed officials knew Greece was entering a critical stage with creditors at the time of the meeting. “Many participants expressed concern that a failure of Greece and its official creditors to resolve their differences could result in disruptions in financial markets in the euro area, with possible spillover effects on the United States.”

Officials emerged from the meeting saying that a first interest rate increase in nearly a decade could be warranted as early as September, but the minutes offer few concrete clues about the shape of the behind-the-scenes discussions on the timing of lift-off.

Instead, the Fed left broad guideposts in the minutes about how the decision will unfold, a development that will leave investors guessing about when it will act.

Officials, the minutes said, “would need additional information indicating that economic growth was strengthening, that labour market conditions were continuing to improve, and that inflation was moving back toward the Committee’s objective” of 2 per cent before acting.

The central bank effectively left its options open for now. Though the global outlook is uncertain and shifting, officials pointed to signs of progress in the domestic economy as reason to begin raising US rates this year. Several had concluded that slack in the US labour market had already disappeared, while others saw it being gone by year-end.

“The ongoing rise in labour demand appeared to have begun to result in a firming of wage increases,” the minutes said.

Moreover, some worried that if the Fed waits too long before raising rates, it might need to move abruptly later, which could cause financial instability. Some participants viewed the economic conditions for increasing the target range for the federal funds rate as having been met or were confident that they would be met shortly.

Since the meeting, the Fed has received mixed economic news. The US jobless rate has continued to decline, to 5.3 per cent in June, an important factor as the Fed looks for signs of reduced slack in labour markets. But growth in business payrolls has slowed. Measures of wages and inflation have firmed but shown few conclusive signs of rising to levels that Fed officials would like to see. Economic growth appears to have rebounded after contracting in the first quarter, but not robustly.

For now, Fed officials are cautious about overseas developments but appear unalarmed.

“I visited China recently, and I arrived fully cognisant of the concerns people highlight — slower growth, the unsustainability of the current export-driven model, debt build-up, bubbles in the equity and housing markets, the risk of falling investment, and the overall international implications of those risks,” John Williams, president of the Federal Reserve Bank of San Francisco, said in a speech in Los Angeles Wednesday.

“But I have to say that, after talking to officials and academics there, I was a lot less concerned about China’s near-term economic outlook on my return flight than I was heading over.”

Dow Jones

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Why the US Federal Reserve is trying not to raise rates
BUSINESS SPECTATOR JULY 24, 2015 10:08AM

Adam Carr

Chief Economist Eureka Report
Sydney

Get this. US jobless claims (new filing for unemployment benefits) slumped to their lowest level in 41.5 years. That’s to the week ending July 18 — they’re down about 26,000 from the previous week (at 256,000). If that wasn’t enough, we found out overnight that the number of home sales (existing) is the strongest since 2007, while house prices themselves (also existing) are at a record: a lofty $236,000.

Even with that kind of data flow, the funny thing is that only half of the economists surveyed by Bloomberg reckon the Fed will hike at the September meeting. You’d think it’s a done deal, yet the market is even less convinced, increasingly pricing in the first move for 2016. Bond yields actually fell overnight.

Part of the problem is that the market has been playing this guessing game with the Fed for five years now and uncertainty is high. It could hike, it certainly should hike — but there is one reason it might not. That one reason, ironically, might be due to movements in the labour market.

Remember the game for Fed watchers over these last few years hasn’t been about plugging growth, inflation and unemployment outcomes into some model to determine whether rates should be higher. It has had plenty of reasons to move since 2010 when the market first expected a rate hike.

Instead, it’s been more about looking at what the Fed could use to justify a lower rate for longer stance. It’s getting hard, admittedly. The labour market does look good and ordinarily you’d think that an unemployment rate, currently at 5.3 per cent from a peak of 10 per cent, would be sufficient for them to lift rates, as would the nearly three million jobs that have been created over the last year alone. That’s nearly eight million jobs over the last few years.

Why is the Fed doing this? There are a few reasons.

Over in Europe, the central bank is still printing money; ditto the Japanese. No one wants the US dollar to get too high. Then of course, no one wants bond yields to get too high either. And there are probably some who are genuinely of the view that higher rates could destabilise growth. This is a Federal Reserve that is terrified of derailing the recovery and it actually has the International Monetary Fund urging it not to hike.

It’s then a simple matter of downplaying figures like those jobless claims numbers we saw last night. Admittedly there are some seasonal issues with the July figures. Car plants usually close down sometimes, and that throws the seasonal factors around. So that 41-year-low probably isn’t one. Even so, the jobless claims numbers have fallen hard — there is no doubt they point to a lower unemployment rate.

How’s the Fed going to get around that? Easy.

The unemployment rate, currently at 5.3 per cent, isn’t going to fall in perpetuity. In fact the Fed is of the view that a number around 5 per cent isn’t unusual and in fact should be regarded as normal. In economic parlance it could be regarded as the non-accelerating inflation rate of unemployment (NAIRU).

Three things to note here. Inflation is currently low, barely above 1 per cent on the Fed’s favoured measure and a good way below the 2 per cent plus threshold. In fact the Fed want to see it get safely above 2 per cent. Yet if an unemployment rate of 5 per cent or so isn’t an inflation accelerating rate, then it’s a good bet it is not going to be too concerned.

Chances are it would want to see it get to “normal” or below and then hold there for some time, just so it could be confident that the labour market had actually reached maximum employment, consistent with their statutory mandate.

From the Fed’s perspective, while unemployment may be falling, the rate of underemployment is still high at 10.5 per cent. That’s well down from the peaks, but it’s still almost 2 percentage points above the average. Similarly, wage growth is still low — less than two-thirds the average.

Here’s hoping the Fed hikes this year — the sooner the better. Unfortunately there is still plenty of things the Fed committee can point to, should it want to delay again.

[greengiraffe]

US stocks: the only six that matter
THE WALL STREET JOURNAL JULY 27, 2015 11:01AM


Many analysts are uncomfortable with the widening divergence between the top gainers and the rest of the US market. Source: AFP
Just a few companies are driving the gains in major US stock indexes this year, raising fresh concerns about the health of the market’s advance.

Six firms — Amazon.com, Google, Apple, Facebook, Netflix and Gilead Sciences — now account for more than half of the $US664 billion in value added this year to the Nasdaq Composite Index, according to data compiled by brokerage firm JonesTrading.

Amazon, Google, Apple, Facebook, Gilead and Walt Disney account for more than all of the $US199 billion in market-capitalisation gains in the S & P 500.

The concentrated gains are spurring concerns that soft trading in much of the market could presage a pullback in the indexes. Many investors see echoes of prior market tops — including the 2007 peak and the late 1990s frenzy — when fewer and fewer stocks lifted the broader market. The S & P 500 is up 1 per cent this year while the Nasdaq has gained 7.4 per cent.

Other indicators are also flashing yellow. In the Nasdaq, falling stocks have outnumbered rising stocks this year, sending the “advance-decline line” into negative territory, a phenomenon that has come before market downturns in the past, investors and analysts said.

Last Monday, as the S & P approached a record, nearly as many stocks hit one-year lows as one-year highs, according to Ned Davis Research, another sometime precursor to rocky times and a flip from 2014 and 2013 when the market rose more broadly. The S & P is 2.4 per cent below its May 21 record high. The Nasdaq hit an all-time high last Monday and has since fallen 2.5 per cent.

A rally driven by just a handful of stocks doesn’t necessarily mean the market has turned unhealthy or that shares will fall. Indeed, sceptics have been warning practically since stocks began their six-year-long rally in the spring of 2009 that a pullback was imminent, citing factors ranging from an uneven economic recovery to rising price/earnings ratios.

Still, many analysts are uncomfortable with the widening divergence between the top gainers and the rest of the market. Many see a stock market that is on the cusp of a shift — though of course no one can predict just what will happen.

“It can go one of two ways: Either the whole market tanks … or the market broadens out,” said Scott Migliori, who manages the $US740 million AllianzGI Focused Growth fund. “The rubber band has been stretched too far.”

Mr Migliori said he has been trimming holdings of internet and biotechnology stocks. Apple, Amazon and Facebook were among the fund’s top five holdings as of May 31, according to Morningstar.

Mr Migliori said he has moved into beaten-down industrial stocks, as well as shares of healthcare companies that have lagged behind the recent rally.

Earlier periods in the postcrisis advance were marked by broader stock rallies. In 2013, the Nasdaq soared 38 per cent, with the top three stocks contributing 17 per cent of the gains, according to JonesTrading. The S & P 500 gained 30 per cent that year, with the top three stocks contributing 8 per cent.

Gains in both indexes were more concentrated last year, though still less so than this year. The Nasdaq rose 13 per cent in 2014, with the top three gainers accounting for 32 per cent of the gains. The S & P was up 11 per cent, with the top three gainers contributing 16 per cent.



“In 2013 and 2014, you had these gangbuster years for the market and everything went up,” said Mike O’Rourke, chief market strategist at JonesTrading. “You have more money chasing fewer stocks now.”

This year, with the Nasdaq up 7.4 per cent, the top three — Amazon, Google and Apple — have accounted for 37 per cent of that gain. Amazon has surged 71 per cent, adding $US104 billion in market value. Google has gained 23 per cent, adding $US79 billion, and Apple is up 13 per cent, adding $US63 billion.

“It makes me cautious because I’ve seen it before,” said John Carey, portfolio manager of the $US5.2 billion Pioneer Fund, whose No. 2 holding is Apple. “There are some features of this narrowing market that do resemble what happened” in the late 1990s tech bubble.

On the eve of the dotcom crash in March 2000, the top six stocks in the S & P had accounted for all of the index’s market-cap gain that year, according to Mr O’Rourke.

Energy and materials stocks have slumped amid a downturn in commodity prices, while rising bond yields have dented high-dividend payers like utilities. Even shares of some longtime technology stalwarts have faltered. Shares of chip maker Intel Corp. are down 23 per cent this year, while cellphone technology firm Qualcomm Inc. is down 17 per cent.

Bull markets have featured thinning rallies in the past, including in the months leading up a swoon last fall in which the S & P 500 fell 7.4 per cent over a month. Ultimately, the broader market caught up and major indexes resumed their march higher.

Jeff Mortimer, director of investment strategy at BNY Mellon Wealth Management, which oversees $US193 billion in assets, said he isn’t worried for now.

Mr Mortimer said his firm in the first quarter pared holdings in some large-cap stocks that have pulled ahead, and moved into small-cap stocks overseas. But overall the firm remains optimistic on US stocks, and it doesn’t think the thinning in the roster of companies driving the indexes higher signals a major pullback is coming soon. “It’s not yet a warning sign,” he said.

To be sure, some remain concerned that stock returns will be limited thanks to high valuations. The S & P 500 is trading at 18.5 times the last 12 months of earnings, up from 17.1 at the beginning of the year and a 10-year average of 15.7, according to FactSet.

At the same time, a slowdown in corporate-profit growth and the prospect of interest-rate increases by the Federal Reserve, widely expected to start this year, have many investors on guard for signs of a faltering market. But then, that refrain has been heard many times in recent years.

“The game is not so simple where you can have a checklist that says, this has happened and that has happened” before a market pullback, said Doug Ramsey, chief investment officer at Leuthold Weeden Capital Management.

Wall Street Journal

[CityFarmer]

It shows the astronomical value of innovation, both to corporation, as well as individuals.

US stocks: the only six that matter
THE WALL STREET JOURNAL JULY 27, 2015 11:01AM


Many analysts are uncomfortable with the widening divergence between the top gainers and the rest of the US market. Source: AFP
Just a few companies are driving the gains in major US stock indexes this year, raising fresh concerns about the health of the market’s advance.

Six firms — Amazon.com, Google, Apple, Facebook, Netflix and Gilead Sciences — now account for more than half of the $US664 billion in value added this year to the Nasdaq Composite Index, according to data compiled by brokerage firm JonesTrading.

Amazon, Google, Apple, Facebook, Gilead and Walt Disney account for more than all of the $US199 billion in market-capitalisation gains in the S & P 500.

The concentrated gains are spurring concerns that soft trading in much of the market could presage a pullback in the indexes. Many investors see echoes of prior market tops — including the 2007 peak and the late 1990s frenzy — when fewer and fewer stocks lifted the broader market. The S & P 500 is up 1 per cent this year while the Nasdaq has gained 7.4 per cent.

Other indicators are also flashing yellow. In the Nasdaq, falling stocks have outnumbered rising stocks this year, sending the “advance-decline line” into negative territory, a phenomenon that has come before market downturns in the past, investors and analysts said.

Last Monday, as the S & P approached a record, nearly as many stocks hit one-year lows as one-year highs, according to Ned Davis Research, another sometime precursor to rocky times and a flip from 2014 and 2013 when the market rose more broadly. The S & P is 2.4 per cent below its May 21 record high. The Nasdaq hit an all-time high last Monday and has since fallen 2.5 per cent.

A rally driven by just a handful of stocks doesn’t necessarily mean the market has turned unhealthy or that shares will fall. Indeed, sceptics have been warning practically since stocks began their six-year-long rally in the spring of 2009 that a pullback was imminent, citing factors ranging from an uneven economic recovery to rising price/earnings ratios.

Still, many analysts are uncomfortable with the widening divergence between the top gainers and the rest of the market. Many see a stock market that is on the cusp of a shift — though of course no one can predict just what will happen.

“It can go one of two ways: Either the whole market tanks … or the market broadens out,” said Scott Migliori, who manages the $US740 million AllianzGI Focused Growth fund. “The rubber band has been stretched too far.”

Mr Migliori said he has been trimming holdings of internet and biotechnology stocks. Apple, Amazon and Facebook were among the fund’s top five holdings as of May 31, according to Morningstar.

Mr Migliori said he has moved into beaten-down industrial stocks, as well as shares of healthcare companies that have lagged behind the recent rally.

Earlier periods in the postcrisis advance were marked by broader stock rallies. In 2013, the Nasdaq soared 38 per cent, with the top three stocks contributing 17 per cent of the gains, according to JonesTrading. The S & P 500 gained 30 per cent that year, with the top three stocks contributing 8 per cent.

Gains in both indexes were more concentrated last year, though still less so than this year. The Nasdaq rose 13 per cent in 2014, with the top three gainers accounting for 32 per cent of the gains. The S & P was up 11 per cent, with the top three gainers contributing 16 per cent.



“In 2013 and 2014, you had these gangbuster years for the market and everything went up,” said Mike O’Rourke, chief market strategist at JonesTrading. “You have more money chasing fewer stocks now.”

This year, with the Nasdaq up 7.4 per cent, the top three — Amazon, Google and Apple — have accounted for 37 per cent of that gain. Amazon has surged 71 per cent, adding $US104 billion in market value. Google has gained 23 per cent, adding $US79 billion, and Apple is up 13 per cent, adding $US63 billion.

“It makes me cautious because I’ve seen it before,” said John Carey, portfolio manager of the $US5.2 billion Pioneer Fund, whose No. 2 holding is Apple. “There are some features of this narrowing market that do resemble what happened” in the late 1990s tech bubble.

On the eve of the dotcom crash in March 2000, the top six stocks in the S & P had accounted for all of the index’s market-cap gain that year, according to Mr O’Rourke.

Energy and materials stocks have slumped amid a downturn in commodity prices, while rising bond yields have dented high-dividend payers like utilities. Even shares of some longtime technology stalwarts have faltered. Shares of chip maker Intel Corp. are down 23 per cent this year, while cellphone technology firm Qualcomm Inc. is down 17 per cent.

Bull markets have featured thinning rallies in the past, including in the months leading up a swoon last fall in which the S & P 500 fell 7.4 per cent over a month. Ultimately, the broader market caught up and major indexes resumed their march higher.

Jeff Mortimer, director of investment strategy at BNY Mellon Wealth Management, which oversees $US193 billion in assets, said he isn’t worried for now.

Mr Mortimer said his firm in the first quarter pared holdings in some large-cap stocks that have pulled ahead, and moved into small-cap stocks overseas. But overall the firm remains optimistic on US stocks, and it doesn’t think the thinning in the roster of companies driving the indexes higher signals a major pullback is coming soon. “It’s not yet a warning sign,” he said.

To be sure, some remain concerned that stock returns will be limited thanks to high valuations. The S & P 500 is trading at 18.5 times the last 12 months of earnings, up from 17.1 at the beginning of the year and a 10-year average of 15.7, according to FactSet.

At the same time, a slowdown in corporate-profit growth and the prospect of interest-rate increases by the Federal Reserve, widely expected to start this year, have many investors on guard for signs of a faltering market. But then, that refrain has been heard many times in recent years.

“The game is not so simple where you can have a checklist that says, this has happened and that has happened” before a market pullback, said Doug Ramsey, chief investment officer at Leuthold Weeden Capital Management.

Wall Street Journal