Low gas prices mean more time to enjoy the road (in traffic)

Stocks partially rebounded after yesterday’s rout, boosted by a mainly positive reading from the Federal Reserve’s Beige Book and other economic data on factory orders and productivity. Asian indexes generally closed lower, while European stocks closed modestly higher.

The Dow jumped 293 points, led by a 4.29% surge in Apple’s shares (AAPL) on reports about the company’s leasing arrangements on new iPhones and its entrance into the content fray to compete with Netflix and Hulu. All but 1 of the Dow’s 30 components advanced. The S&P 500 Index gained 35, and the Nasdaq rose 113. Advancers led decliners by 14 to 5 on the NYSE and 11 to 5 on the Nasdaq. The prices of Treasuries weakened. Gold futures fell $6.20 to close at $1,133.60 an ounce, and the price of crude oil rose 84 cents to settle at $46.25 a barrel.

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Markets messing with monetary policy?

Federal ReserveHow does market volatility affect central banks and the decisions they make? Dr. Brian Jacobsen, CFA, CFP®, explains in this edition of the On the Trading DeskSM.

Listen to the full interview (new window).

Well, Brian, let’s start with the most recent market volatility. Do market moves like that sway the Fed or central banks around the world?
Well, I think that the most recent moves in the markets perhaps have policymakers shaken, but not stirred, to quote James Bond. But I’m not sure that it has stirred them to actually change any of their longer-term monetary policy plans. Part of it is because some of these market moves can be temporary, or perhaps to use one of the Fed’s favorite phrases, it’s transitory.

So I think their expectation is, let’s see how this shakes out a little bit before we actually stir things and change our plan.

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Stocks tumble on China’s manufacturing slowdown

Stocks posted sharp losses, after a renewed wave of bad news on China’s economy. The markets reacted to new data revealing a disappointing August for the Chinese manufacturing and services sectors. Stateside, a read of the U.S. manufacturing sector also disappointed, while a construction spending update showed a seven-year record high.

The Dow dropped 469 points, with all of its 30 components retreating; the S&P 500 Index lost 58 points; and the Nasdaq declined by 140 points. Decliners led advancers by six to one on the NYSE and by four to one on the Nasdaq. The price of the 30-year Treasury weakened, while the price of the 10-year Treasury strengthened. Gold futures rose $7.30 to close at $1,139.80 an ounce. The price of crude oil fell $3.79, or 7.7%, settling at $45.41 a barrel.

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These two charts show market volatility could last a while

How common are bear markets? How long do corrections last? What are the reasons behind them throughout the past few decades of market history? Dr. Brian Jacobsen, CFA, looked at decades of data and collated them with historical events to create this compelling history of markets gone bad. One thing is clear: Thank goodness we’re out of the 70s.

Click on the image below to access our new interactive chart where you can view the events that led up to each bear market or correction, how long it lasted, and how long it took the markets to recover.

A brief history of corrections and bear markets
Source: Author’s calculations

After you hit bottom, isn’t the only way to go up? It’s not entirely clear that August 25 was indeed the bottom for this bull market correction, though I think it was. If it was, then using the 9 bear market bottoms and 25 bull market corrections of the past 65 years would suggest you should expect volatility in the wake of the correction to be twice what it was on the way down. But how long does the heightened volatility last? If history is any guide, it takes about 80 trading days (approximately four months) for things to settle down.

Ratio of volatility after hitting bottom to volatility in the run up to hitting bottom
Source: FactSet and author’s calculations

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Earnings season: Where’s the beef?

Burger with no meatGrowing up, I loved commercials. They were entertaining and short enough for my attention span. One of the best had the tagline, “Where’s the beef?” When ordering a hamburger from a fast food joint, the beef was the substance. It was also the expensive part, so restaurants would skimp on serving sizes. How about earnings season? Where’s the beef?

The question is particularly relevant this year. With the recent market volatility, it’s easy to lose sight of the underlying fundamentals of the businesses you can invest in. I think it’s important to reground ourselves at times and look at those fundamentals. The year-over-year growth of earnings per share (EPS) for the S&P 500 Index was basically flat in the second quarter. That’s actually much better than many expected, given the well-publicized struggles of major sectors. Energy stocks within the S&P 500 Index reported a year-over-year EPS decline of 55%. Industrials posted a 4.7% decline. Other than those two, the other eight sectors posted EPS growth.

Many investors, however, prefer to look at sales-per-share growth as a better indicator of a company’s underlying health, particularly in the wake of postrecession maneuvers that may have boosted earnings more through cost-cutting than organic revenue growth. Sales-per-share growth was negative 3.4%, year over year, with four sectors posting declines in sales per share: energy (-31.8%), industrials (-4.3%), materials (-10.0%), and utilities (-4.8%).

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Study: Several hours in the day still untouched by email

The markets bid a hasty goodbye to August, ending a volatile month firmly in the red. The unlikely story of the day was a surge in crude-oil prices on speculation that big oil producers would begin cutting production. The rally boosted energy stocks, with the energy sector the only S&P 500 Index sector that closed in the green.

The Dow dropped 114 points, with 24 of its 30 components retreating; the S&P 500 Index lost 16; and the Nasdaq fell 51. Decliners led advancers by five to four on the NYSE and more narrowly on the Nasdaq. The prices of Treasuries weakened. Gold futures fell $1.50 to close at $1,132.50 an ounce, and crude oil climbed $3.91, or 8.34%, to settle at $50.77 a barrel.

For the month of August, the Dow sank 6.57%, the S&P 500 Index declined 6.25%, and the Nasdaq lost 6.85%.

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In this market, don’t outsmart yourself by playing the fear

Manley on the Street“It’s the smart move; Tessio was always smarter.” Michael Corleone, The Godfather

If you’re a fan of The Godfather, the quotation above needs no explanation. If you’re not a fan, I suggest you watch it and see an example of the smart move not necessarily being the right move (hint: Tessio comes to regret his decision).

I think that we investors are plainly on the horns of a similar dilemma today. The equity market is in free fall (don’t read the rally of last week as an all clear; there is still much to worry about). The major equity indexes have given us generous gains in the past six years, and we are still within 10% of all-time highs. People are sitting on profits, big profits, and they can lock them in with a quick phone call or the push of a button. In such a situation, the fundamentals don’t matter to the thought process. It is game theory, not fundamental analysis, that determines the outcome. And some might argue game theory says to step aside now and come back in later.

Think of being in a small plane that is suddenly losing altitude. The instruments say nothing is wrong. This is not far outside of the normal variations from flight plan. Yet, if you have a parachute and a chance to use it, who am I to tell you not to use it? “There will be other planes and other chances to fly them.” Who am I, who is anyone, to tell you not to bail out?

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Stocks close mixed after comments from Fed vice chair

Stocks moved higher in early trading before a CNBC interview with Federal Reserve Vice Chairman Stanley Fischer. Many investors interpreted his comments as favoring a September rate hike, and the markets ticked lower after the interview.

The Dow slipped 11 points, with 17 of its 30 of its components declining; the S&P 500 Index inched up 1; and the Nasdaq added 15. Advancers led decliners by about two to one on both the NYSE and the Nasdaq. Treasury prices weakened. Gold futures rose $11.40 to close at $1,134.00 an ounce. Crude oil had its best week in six years and gained $2.66 to settle at $45.22 a barrel, a nearly 12% increase for the week.

Despite the heavy losses on Monday and Tuesday, all of the major indexes finished higher for the week. The Dow increased 1.09%, the S&P 500 Index was up 0.89%, and the Nasdaq climbed 2.58%.

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Get smart, says Verizon to 150M non-connected cars

Stocks continued yesterday’s rally, boosted by stronger-than-expected GDP data, rallies in Asia and Europe, and the New York Fed president’s comments that the basis for a September rate hike has become “less compelling” amidst global market volatility.

The Dow jumped 369 points, with all of its 30 components advancing; the S&P 500 Index added 47 points; and the Nasdaq gained 115. Advancers led decliners by eight to one on the NYSE and by nearly three to one on the Nasdaq. The prices of Treasuries strengthened. Gold futures fell $2 to close at $1,122.60 an ounce. The price of crude oil climbed 10%, or by $3.96, settling at $42.56 a barrel.

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The advisor’s role when markets are rolling

Stock market screenDr. Brian Jacobsen and Jon Lagerstedt put risk into perspective to help you help your clients through volatile markets.

Listen to the full interview (new window).

This week we’re discussing the advisor’s role when the markets are rolling. I’m Jon Lagerstedt, and this is The Essential Practice. With me today is Chief Portfolio Strategist with Wells Fargo Asset Management, Brian Jacobsen. Welcome, Brian.
Thanks for having me.

Brian, you know with the market volatility being what it is, I wonder if we could just take a moment today to get your advice for financial advisors working with clients during these extremely volatile periods in the markets.
Sure. Hopefully, I can offer some perspective here. And that I think it’s important to really kind of go back to the tape and look at what triggered this. This was the culmination of many different factors, with the Chinese government’s move to allow their currency to fluctuate being almost like the straw that broke the camel’s back, so to speak. But it’s also important to put this into context. Intraday moves, like we had on Monday, August 24. By my calculations, there was a swing of around 5.1%. That type of swing intraday, it’s rare. That has happened, according to my calculations, going back to daily highs and lows for the S&P 500, going back to 1950—that’s only happened 0.52% of the time. Now, the bulk of those moves were clustered during the financial crisis and 1987. And maybe part of what made this most unnerving is that the most recent experience that we had with this type of volatility was not a very good experience.

So, recognize that these are rare events, but they do happen.

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