It’s getting harder to avoid toll roads

Consumer inflation stayed tame in September, while shares of several big companies—like Boeing and Biogen—sold off despite releasing earnings reports that, for the most part, beat expectations. The major indexes started modestly higher but reversed course in afternoon trading, with weakness in the industrials and energy sectors.

The Dow fell 153 points, with 24 of its 30 components retreating; the S&P 500 Index lost 14; and the Nasdaq dropped 36. Decliners led advancers by 9 to 4 on the NYSE and 3 to 1 on the Nasdaq. The prices of Treasuries weakened. Gold futures dropped $6.20 to close at $1,245.50 an ounce, and the price of crude oil sank $1.97 to settle at $80.52 a barrel, the lowest closing settlement since July 2012, in large part due to a report that showed a larger-than-expected increase in crude oil stockpiles.

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Pardon the correction (podcast)

Picture of stock chartSharp market moves, like what we experienced mid-October, concern investors and leave them worried: Has this bull of a market tired out? It’s more important to understand the distinction between bear markets and corrections. Here to help is John Manley, chief equity strategist with Wells Fargo Funds Management, LLC.

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September’s CPI: More dispersion than inflation

Spray bottle dispersing waterThe Consumer Price Index (CPI) increased 0.1% in September, or 1.7% year over year. Energy costs declined, but those declines were offset by increases in housing and food costs. For October, CPI growth could tip negative with the recent deeper decline in energy prices, but that deflation would likely be transitory.

Housing costs have been increasing faster than most other components of the CPI. Durable-goods prices (items expected to last three years or longer) have dropped 1.5% over the past 12 months, while nondurable-goods’ prices have increased 1.0%. Services prices have gone up 2.5%. Generally, inflation is progressing at a slow pace, but that masks a lot of variation in prices. High variation in prices can be as disruptive as higher inflation as relative prices shift consumer spending around quite a bit. This can create a challenging environment for retailers that incur costs in changing prices and shifting inventories to accommodate changes in consumer spending.

Real average hourly earnings fell 0.2% from August to September. Compared with September 2013, real average hourly earnings are up 0.3% and real weekly earnings are up 0.6%. It’s not a great environment for boosting consumer spending, but it’s a good enough environment to keep growth chugging along.

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Big Data, meet Big Yoga

Stocks rallied on Apple’s positive earnings, as well as encouraging home sales data and reports that the European Central Bank is considering buying corporate bonds to stimulate regional growth. The Dow climbed 215 points, with 27 of its 30 components advancing; the S&P 500 Index rose 37 points; and the Nasdaq gained 103. Advancers led decliners by nine to two on the NYSE and by three to one on the Nasdaq. The prices of Treasuries weakened. Gold futures rose $7.00 to close at $1,251.70 an ounce. The price of crude oil increased by 58 cents to settle at $82.49 a barrel.

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Family, finances, and the financial advisor (podcast)

A family meeting with their financial advisorA family meeting regarding personal finances, led by a financial advisor, helps future generations learn the value of a dollar—in the context of family values. Here to explain is Wayne Badorf, CFP®, CFS®, head of Intermediary Sales with Wells Fargo Asset Management.

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Why we’re not worried about a bear market

Today’s post is a joint collaboration between John Manley, CFA, and Dr. Brian Jacobsen, CFA, CFP®.

SummaryPicture of a bear

  • We see the recent bout of volatility as a normal part of investing.
  • A historical look at corrections shows that they do not all signify the start of a bear market. By the same token, not every decline is a correction.
  • From our perspective, the upside looks more attractive than the downside looks ugly.

People like to pretend investing is a science. There is, indeed, a quantitative aspect to investing, with present-value calculations and the like, but most of investing is storytelling and understanding the psychology of crowds. You can push the psychology part a bit too far, though, labeling markets as irrational. Markets aren’t irrational—investors are. Besides, what’s more irrational, a market-determined price or insisting that a model of prices (say, the cyclically adjusted price/earnings model) is correct when the market regularly disagrees with the model? Prices are what they are, and you may as well embrace reality rather than wish it away.

Markets are just places—virtual or real—where prices are set. Lots of things, perceptions and misperceptions alike, can drive market prices to different levels. To further perpetuate the myth that markets are like machines and prices are set mechanically, those in the investment community also like to try to create arbitrary definitions of events: corrections, bear markets, golden crosses, and death rays (maybe we made that last one up). A stock market correction is, by most people’s account, a peak-to-trough decline of 10%. A bear market is a peak-to-trough decline of 20%. We’d argue that duration also matters, not just magnitude. A rapid decline and recovery is very different than a prolonged period of time when prices decline. One you can just ride through and ignore, while the other requires you to reassess your portfolio strategy. Of course, even these definitions aren’t really all that great. Should you measure the prices as of the end of day, as of some other point in the day, or some average? Thinking about how arbitrary and unscientific things are in investing is somewhat distracting, however. Ultimately, we need to decide, what should we do? At some point, money must be invested and action must be taken.

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A new variable for the buy/rent calculator

Stocks were generally positive on a light news day. The biggest news was IBM’s significant miss on third-quarter earnings and revenue, which almost single-handedly drove the Dow into the red despite more upbeat results for the S&P 500 Index and the Nasdaq.

The price-weighted Dow was the weakest of the indexes, gaining only 19 points, or 0.12%, due in large part to a 7.11% tumble in the shares of IBM (IBM), one of the Dow’s priciest components. Twenty-four of its thirty components gained ground. The S&P 500 Index rose 17, and the Nasdaq gained 57, the biggest percentage gainer at 1.35%. Advancers led decliners by nearly three to one on the NYSE and just under two to one on the Nasdaq. The prices of Treasuries strengthened. Gold futures gained $5.70 to close at $1,244.70 an ounce, and the price of crude oil fell 15 cents to settle at $81.91 a barrel.

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A brief history of bear markets: Anything but quick

Manley on the StreetIt is a terrible thing when stocks go down. Whether it is a quick and nasty bull-market correction or a protracted and grinding bear market, it destroys wealth and damages egos.

However, with the stock market under pressure last week, I think it is important to draw a distinction between a correction and a bear market. The standard demarcation used on Wall Street is 20%: less than a 20% decline and it is a correction; more than 20% and it is a bear market. It is an arbitrary but not unreasonable distinction.

With that in mind, we decided to look back at the five big bear markets of the past 50 years (1968–1969, 1973–1974, 1980–1982, 2000–2002, and 2007–2009). We excluded 1987 from the study as a true aberration, a hellish exception to the rules that followed what seemed to be a delightful exception to the rules. Stocks came down in October 1987 with few fundamental reasons because they had gone up with few fundamental reasons in the first nine months of that year. It was a bit like the decompression of the second quarter of 2000, which followed hard on the upward explosion of the prior four months, when the Nasdaq soared almost 50% on truly irrational exuberance. In my opinion, neither of these periods bear the slightest resemblance to the heavy slogging of the past nine months.

The point I want to make is simple. While bear markets are terrible and devastating (the average decline in the five instances was over 43%, with an average duration of 20 months), they are also very slow to develop.

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Stocks end volatile week with strong rally

Stocks rallied across the U.S. and Europe today after earnings reports continued to come in favorably and the European Central Bank prepared to start its asset-purchase program.

The Dow jumped 263 points, with all of its 30 components gaining ground; the S&P 500 Index rose 24; and the Nasdaq was higher by 41. Advancers led decliners by nearly two to one on the NYSE, while decliners narrowly led on the Nasdaq. The prices of Treasuries weakened. Gold futures fell $2.20 to close at $1,239.00 an ounce, and the price of crude oil gained 11 cents to settle at $82.06 a barrel.

For the week, one characterized by heightened volatility, the Dow was down 0.9%, the S&P 500 lost 1.0%, and the Nasdaq was off by 0.4%.

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Is the Hamburglar running Burger King’s ad unit?

Stocks recovered early from yesterday’s losses but ended the session in mixed territory as the market shook off the mid-week selling frenzy. Investors reacted positively to encouraging data on employment and industrial production along with remarks from the St. Louis Federal Reserve Bank’s president that the Fed should wait on ending quantitative easing. On the negative side, we have lower homebuilder sentiment and news that eurozone inflation sunk to a five-year low. Moving forward, investors will be watching third-quarter corporate earnings for signs of private-sector strength.

The Dow fell 24 points, with 20 of its 30 components declining; the S&P 500 Index ended just above even; and the Nasdaq added 2.Advancers led decliners by nine to four on the NYSE and by two to one on the Nasdaq. The prices of Treasuries weakened. Gold futures fell $3.60 to close at $1,241.20 an ounce. The price of crude oil rose 92 cents to settle at $82.70 a barrel.

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