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Thursday, October 30, 2014

There should be no question that QE3 initiated in September 2012 and expanded in December 2012 to $85 billion per month was a success. The revisionists who dispute this don’t have the facts on their side. In the third quarter of 2012 a key indicator for future corporate profits, ISM Manufacturing, turned negative. Due to this Global Perspectives initiated concerns warning that 3Q-2012 earnings growth were at risk of being negative for the first time since 3Q-2009. As the third quarter earnings season progressed it looked ominous and then when the final reports came in for the S&P 500, in fact earnings growth was negative. Earnings growth tends to trend in one direction for long periods of time so a single negative reading is a precursor to a profits recession and worse – a bear market. The Fed’s extraordinarily aggressive QE3 came at the right time, lifted investor enthusiasm, bolstered business confidence and consumer spending. Earnings growth rebounded the very next quarter and has continued to be positive since. While QE3 doesn’t get all of the credit it was the right medicine at the right time. QE3 was an unequivocal success. Meanwhile, U.S. GDP handily beat expectations at 3.5 percent. Please see page 45 of the Voya Global Perspectives book, "Monetary Policy," to compare the Federal Reserve’s balance sheet expansion to the ECB’s balance sheet contraction.

Wednesday, October 29, 2014

Twenty-seven years ago this month the stock market plunged. Investors dubbed that horrible day Black Monday. Many investors may remember the more than 33 percent drop from August through the beginning of December that year; but do they remember that in 1987 the S&P 500 actually ended the year in positive return territory? In 1987 the market was up 2 percent. This year October 2014 started out on a bad note, however, as of this week the S&P 500 has turned positive for the month. Large caps are not the big story here. It’s actually small caps that have soared, up 4.7 percent for the month and are now positive YTD. Global Reits are also up 4.7 percent for October and over 12 percent YTD. Diversification works. Gaming diversification and market timing doesn’t work. Please see an example of a globally diversified portfolio on page 5 of the Global Perspectives book.

Tuesday, October 28, 2014

Economic data reported today was mixed. First the bad news - durable goods orders were weak in September, falling 1.3 percent mainly because of the volatile aircraft orders component. However, nondefense capital goods shipments rose at a 16.0 percent at an annual rate in third quarter, suggesting capital expenditures and exports in the 3Q GDP report should be strong. Next the okay news - housing prices as reported by the Case Shiller Index showed 5.6 percent year-over-year growth in August. This means housing prices are still clearly rising, but at a slower rate. Finally, the good news - the Conference Board reported that consumer confidence in October rose to 94.5 from 89 in September, a seven year high. Falling oil prices, improving labor conditions and an overall positive U.S. economic outlook are bolstering consumer sentiment. Meanwhile, corporate earnings continue to look strong with year-over-year growth of about 7 percent with half the companies reporting. Concerns of the global growth outlook are still present but the market has settled down after weeks of volatility. An up day today may actually reverse the S&P 500 returns for the month from negative to positive. Please follow durable goods orders on page 61 of the Global Perspectives book.

This morning on Fox Business, Doug explained what caused the current drop in oil prices and what this means for consumers. If you missed it, watch it here.

Friday, October 24, 2014

Brazil used to be the darling of Latin America but has stumbled in the last few years. Now Brazil is in recession and facing soaring inflation. Its investment grade bond status is threatened by its ever widening budget deficit, business confidence is near a five year low and it was the only BRIC country to experience a decrease in foreign direct investment last year. However, the election of a new leader on Sunday could turn things around. Presidential candidate Aecio Neves is running against incumbent Dilma Rousseff. In the last 12 years many Brazilians have risen out of poverty under her Worker’s Party rule, but in the years under her direct oversight growth in Brazil has fizzled, averaging less than 2 percent per year. Neves is known to be extremely pro-business. Similar to the election of Narendra Modi in India, this could be the spark Brazil badly needs. Meanwhile, U.S. markets were up big yesterday based on news that Germany’s PMI manufacturing index beat expectations coming in at its best level since July and Saudi Arabia cut its oil production – putting a stop to the steep decline in oil prices for now. Please follow international economies on page 52 of the Voya Global Perspectives book.

Also, in case you missed Doug on Bloomberg TV yesterday click here to hear more about his views on the markets and Voya’s Born to Save campaign.

Thursday, October 23, 2014

According to an article on, since 1980 the S&P has been positive in 26 out of the last 34 years. More importantly, "between 1980 and the middle of 2014 the S&P 500 has risen 17 times over, including reinvested dividends. That's an approximate compound annual return of 8.5 percent." The message is clearly that the market rises over time. Unfortunately, as the last couple weeks have illustrated, the line up is not always a straight line. Corporate earnings growth is the guiding force behind the market and the current U.S. economic string of strong data points is providing an optimistic backdrop for continued growth which is currently greater than 8 pecent with one-third of the S&P 500 companies reporting for Q3. The latest positive data is on the jobs front – weekly jobless claims were again below 300K for the sixth week in a row, the first time we have seen this since 2006. Please follow the Dow’s 100 year growth trajectory on page 26 of the Global Perspectives book.

Wednesday, October 22, 2014

CPI met expectations for year over year growth through September at 1.7 percent. Increases in shelter and food inflation outweighed declines in energy. A big fear in the markets right now is any sign of deflation in the U.S. since Europe is currently at risk of deflation and recession. Third quarter corporate earnings are coming in better than expected and we are forecasting another 7 percent quarter for earnings growth. Fundamentals are sound but risks remain. Please see page 5 of the Voya Global Perspectives book for an "Effectively Diversified" portfolio.

Tuesday, October 21, 2014

So it is official that one of the biggest M&A deals of the year is a bust due to direct and intentional action from U.S. Treasury Secretary Jacob Lew. The Wall Street Journal reported "Mr. Lew reiterated that the Obama administration is weighing regulator action to limit the economic appeal of (tax) inversion." This cascaded to halt a number of M&A deals that were certainly in part attractive due to the tax advantages of the deal. Corporate M&A is a sign of market health and we have been calling 2014 "the year of the deal" since M&A has surged back to 2007 levels. This is a welcome return to normal and certainly has bolstered the markets this year. Government should heed the "law of unintended consequences" when deciding to interfere with markets and should instead examine the root cause of the rise of tax inversions which is the U.S.’s second highest corporate tax rate in the world. Recent volatility was in part coincident with this government threat of regulatory action. Meanwhile, the ECB has initiated bond buying stimulus rallying European markets and U.S. housing starts and existing homes continue their strength, jobless claims plummeted to the lowest level in 14 years and consumer sentiment rose to the highest level since July 2007. Please see page 63 of the Global Perspectives Book "Corporate Income Tax Rates" for insight into relative rates by countries.

Thursday, October 16, 2014

Donald Rumsfeld gets credit for identifying "unknown unknowns -- the ones we don't know we don't know." We now know U.S. treasury ten year yields dropped below two percent for a time yesterday; we now know that global equity markets are getting hit relentlessly and that U.S. equity markets have all but given up gains for the year. Not good news but crystal clear and it may in fact be the “pullback” that many investors have been looking for along with being a test to separate the strong investor from the weak day trader. But I don’t know what to make of the unknown impact of Ebola. Why, as CNN reports, is the Chairman of the U.S. Joint Chiefs of Staff, General Martin Dempsey so worried about Ebola? His role is military not medical. CNN reports “The chairman said he has been concerned about Ebola as a global threat for at least 90 days." "I'm worried about it because we know so little about (Ebola)," he said, adding that his worry is stoked by seemingly conflicting information about how the virus can be spread.” Meanwhile, good news on initial employment claims and industrial production in the U.S. Please see page 57 of the Voya Global Perspectives book, “Unemployment Rate,” to see the strength of leading indicator claims data.

Wednesday, October 15, 2014

Perfect storm are two words that really don’t go well together. Perfect implies good and storm implies bad. But, the alternative can’t be used in polite company, so yes we are in a perfect storm. The surging dollar, plummeting oil prices and recessionary bond yields are creating havoc in the markets because they are signaling deflation. No, not just in Europe but globally as well. How did this happen so quickly? In a word - Russia. The impact of sanctions on Russia hit Germany more than we expected, which means Germany was weaker going into it than we thought. Now it looks like they are headed toward recession. Germany’s consistent strength was the bulwark against European recession and a key support for a strong Euro. The exit of the Euro was abrupt as money flows charged across the pond to the U.S strengthening the dollar. The U.S. dollar is the global reserve currency and its precipitous rise caught the markets by surprise and is negatively impacting global markets. A couple points, one, politicians should keep the “law of unintended consequences” in mind when making decisions and two, it is good to be effectively diversified prior to markets getting hit hard. Meanwhile, U.S. corporate earnings are off to a good start and Retail Sales was a disaster. Please see Voya Global Perspectives monthly article from 2013 “The Good, the Bad and the Ugly," which describes how seemingly small events can conspire to disrupt global markets.

Tuesday, October 14, 2014

Our contrarian $80 oil price target for 2014 West Texas crude oil is within a whisker of being achieved and global oil, brent crude, is dropping in concert. It is a pyrrhic victory though since it is creating shock waves around the globe. The U.S. in particular has been enjoying an energy renaissance in part due to high oil prices. High prices are a requirement to support the high cost of advanced drilling techniques such as horizontal hydraulic fracturing (fracking). The breakeven oil price is around $80, not only for U.S companies, but for many OPEC countries including emerging countries such as Mexico. Below this price is not only a revenue shortfall but it is unprofitable. Well, we have seen this before and it is not good, as in 1997 which culminated in a precipitous drop in oil. Yes, back then it dropped to $10 and crashed the Russian economy. This time is $80 the new $10? No, not likely, but unless prices stabilize requiring the global glut of oil to get worked off then “Houston we have a problem”. Meanwhile, S&P 500 earnings season is getting into full swing with Financials reporting, which are expected to have the highest contribution to earnings growth of any sector. Please follow “Oil Price and Intensity” on page 66 of the Global Perspectives book for insight into how the economy needs less oil to produce $1 of Economic Growth.


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