Why we’re “over the moon” for space exploration again

The markets rallied today as the Chinese and European central banks announced moves to stimulate slowing economic growth.

The Dow was up 91 points, with 24 of its 30 components advancing; the S&P 500 Index advanced 10; and the Nasdaq added 11. Advancers outpaced decliners by 2 to 1 on the NYSE and by 10 to 9 on the Nasdaq. Treasury prices strengthened. Gold futures rose $6.80 to close at $1,197.70 an ounce, and the price of crude oil gained $0.66 to settle at $76.51 a barrel.

For the week, the Dow climbed 0.9%, the S&P 500 Index increased 1.1%, and the Nasdaq was up 0.5%.

In Earnings News:

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Vacating a vocation via viral video? How vainglorious.

Stocks edged higher as rising oil prices boosted energy shares and investors eyed upbeat data on jobless claims and the housing market. The Dow gained 33 points, with 18 of its 30 components advancing; the S&P 500 Index rose 4 points; and the Nasdaq added 26. Advancers led decliners by two to one on the NYSE and the Nasdaq. The prices of Treasuries strengthened.

Gold futures fell $3.00 to close at $1,190.90 an ounce. The price of crude oil rose $1.35 to settle at $75.85 a barrel.

In earnings news:

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Looking for growth in all the wrong places (excerpt)

John Manley, CFA, chief equity strategist at Wells Fargo Funds Management, LLC, points investors in a better direction for opportunity in stocks in this excerpt of On the Trading DeskSM from Tuesday, November 18, 2014.

Listen to the full interview. 

John Manley

John Manley

First, John, with the S&P 500 Index inching past highs, occasionally dipping back below, can you give us perspective on what’s going on? Are these moves justified or a head-fake?
I don’t think it’s a head-fake. And I think there’s still upward pressure being exerted on the market. The Federal Reserve is still accommodative, and that provides a pretty good environment for stocks. The analogy I like to use is it’s like pushing a beach ball under the waves. You can push it down, but it keeps coming up. And that’s what the Fed is doing for the stock market right now.

Where might investors be parking their assets that could be, perhaps, in the wrong places?
I get a sense that people are still very concerned. To me, the speed with which the market came down in October is indicative of the fact that we don’t have deep-seated conviction or confidence in the market. People are spooked out fairly easily. And that is, I think, perversely, a very good sign. It means there are people yet to be convinced. So, I think people are putting up with very low returns in cash equivalents when there are better returns in stocks.

Is one of the lessons investors can learn from that mid-October drawdown that they should anticipate moments of panic?
I think you do have to have the courage of your confidence. People have to set goals for themselves: what kind of retirement income, what kind of wealth—and think about it over the longer term. Look for opportunities that give them the chance to actually augment that goal. Don’t be afraid to buy anything on weakness. As long as the Fed is accommodative and earnings are in an upward trend, I think the market will take care of itself.

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Black Friday deals more like normal Friday deals

Minutes from the latest Federal Open Market Committee meeting showed there was growing awareness of the threat that a global slowdown could pose to the U.S. economy, but the improving job market and economic growth in the U.S. led the Fed to continue with its plan to wind down the third round of quantitative easing. Stocks, which had been deeper in the red most of the day, cut some of their losses after the afternoon release of the statement.

The Dow ended lower by 2 points, with 17 of its 30 components retreating; the S&P 500 Index lost 3; and the Nasdaq dropped 26. Decliners led advancers by eight to five on the NYSE and five to two on the Nadsaq. The prices of Treasuries weakened. Gold futures fell $3.20 to close at $1,193.90 an ounce, and the price of crude oil dropped 14 cents to settle at $74.50 a barrel.

In earnings news:

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How core is your core bond fund?

logsSome core bond funds are less core than others. What risks might that present to investors, and what should investors know about their core bond funds? We asked Aldo Ceccarelli, CFA, head of investments with Wells Fargo Funds Management, LLC, to explain exactly what a core bond fund is and what role it can play in a portfolio.

What is a core bond fund, and what role does it play in an investor’s portfolio?
Core bond funds are strategies generally benchmarked against the Barclays U.S. Aggregate Bond Index, which broadly represents the investment-grade taxable U.S. bond market. As a result, core bond funds invest primarily in U.S. Treasuries, agencies, corporate bonds, mortgage-related securities, and other investment grade bonds. Now, these funds generally play the role of a centerpiece for the fixed-income portion of an investor’s portfolio because they can provide broad exposure to different bond sectors and maturities.

You’re finding core bond fund managers who are dipping down in quality into the high-yield space. Help us understand why that’s a problem, especially because better performance is sometimes the outcome.
While very few investments are inherently bad investments, if investors believe that their core bond funds tend to look like the Barclays U.S. Aggregate Bond Index, while in reality the funds hold a large allocation to noninvestment-grade debt, then they’re being exposed to some unintended risks. Investors may not notice unintended risks when they perform well, but it’s hard to miss them when they go against you.

What are the unintended pitfalls investors might experience if their core bond fund managers drift away from what’s expected?
That’s a good question, but let me be clear first though to say that, considered by themselves, high-yield bonds can be an appropriate investment strategy. But they are decidedly not a core bond strategy. The use of low-investment-grade securities can be a legitimate way of allocating portfolio risk and transforming a core bond strategy into, say, a core-plus strategy, where the plus indicates that there are some specific additional risks that are being taken. Adding high yield in a portfolio may increase performance potential.
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FOMC Minutes: Appearances are everything

The Federal Open Market Committee (FOMC) released the minutes from its October 28–29 meeting, when the Federal Reserve (Fed) wrapped up QE3. At the meeting, the Fed also acknowledged that the labor markets had made enough progress that there was no longer “substantial” underutilization of labor resources. Those were big decisions, and there was a wide-ranging discussion around those decisions.

One thing that stuck out in the minutes was the extent to which Fed officials debated whether to modify its language. When it came to market volatility, they thought they should say something to make it clear they cared. But then they thought they shouldn’t say anything because they didn’t want people to think they cared too much. When it came to signs of weakness outside the U.S., they wanted to say something, as foreign weakness does pose some downside risk to the U.S. outlook, but they didn’t want to say something lest people assume they were overly pessimistic about the growth outlook. Acknowledging the tension, they decided to say nothing in the policy statement, letting others speak their minds in the multitude of speeches by Fed officials that was sure to follow.

The Fed may be facing a new conundrum in the quarters ahead, as it hits its policy objective on the full-employment side but continues to miss on the stable prices side. The Fed interprets stable prices in its mandate to mean 2% inflation (that’s more like steadily increasing prices, not stable prices, but whatever). Most Fed officials (not all, but most—at least those that matter, which are those that are voting members in 2015) seem comfortable with letting the unemployment rate drop below what it views as “full employment” as long as inflation still remains below its target. Investors shouldn’t expect the Fed to actually start tightening monetary policy until well after inflation seems sustainable at 2%. Raising rates isn’t tightening monetary policy. It’s only tightening when higher rates begin to bite. That’s a long ways off.

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Hasbro takes its toys and goes home

Stocks advanced on positive homebuilder sentiment in the U.S. and renewed dedication to economic stimulus measures overseas. The Dow rose 40 points, with 20 of its 30 components advancing; the S&P 500 Index gained 10 points; and the Nasdaq added 31. Advancers led decliners by three to two on the NYSE and the Nasdaq. The prices of Treasuries strengthened. Gold futures rose $13.60 to close at $1,197.10 an ounce. The price of crude oil fell $1.03 to settle at $74.61 a barrel.

In earnings news:

  • Home Depot’s third-quarter net income rose 14% to $1.5 billion, on revenue of $20.5 billion, up 5%. Buoyed by a 5.2% climb in same-store sales, both figures beat analysts’ estimates. The company maintained its full-year outlook but warned that the 2014 data breach that affected 56 million customer debit and credit cards could hurt future earnings. Home Depot’s shares (HD) fell 2.09%.

 

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Looking for growth in all the wrong places

John ManleyWe’re helping investors who might be looking for growth in all the wrong places. Here to discuss are Chief Equity Strategist John Manley and Chief Portfolio Strategist Dr. Brian Jacobsen with Wells Fargo Funds Management, LLC.

Listen to the podcast.

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Apple: Bigger than an entire stock market

Japan’s economy unexpectedly entered a recession in the third quarter, tensions increased in Russia and Ukraine, and industrial production in the U.S. declined. Stocks struggled throughout the day, eventually closing mixed.

The Dow gained 13 points, with 15 of its 30 components declining; the S&P 500 rose 1; and the Nasdaq dropped 17. Decliners led advancers by five to four on the NYSE and just under two to one on the Nasdaq. The prices of Treasuries weakened. Gold futures fell $2.10 to close at $1,183.50 an ounce, and the price of crude oil backed off 18 cents to settle at $75.64 a barrel.

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It takes energy to buy on weakness

Manley on the StreetI have never claimed to understand the commodity markets, much less to be able to correctly predict their direction. Holdings tend to be short term in nature and more highly leveraged than the equity market. In my opinion, the former makes commodities subject to unpredictable events, while the latter tends to supercharge both upward and downward moves.

However, I do have some experience with the behavior of markets in general, and I can see how momentum can amplify fluctuations beyond their rational and justified ambits. There is a tendency to pile on and join the crowd. There is nothing like an increase in the price of something to prove that that price can go up. The same seems true of declining prices. Predictions of a 30% price rise after a 30% price rise or a 30% price fall after a 30% price decline fall on eager and susceptible ears. These predictions also draw attention away from the fact that the recent rise or fall in prices might not actually have been predicted by the predictor. It is a fresh start and a new headline.

I think some of this behavior is now affecting the crude oil market. I certainly didn’t see the recent decline in oil prices coming. In fact, I was recommending an overweight position in the energy sector. I have thought long and hard about this and have come to the conclusion that I should stay with that overweighting for a number of reasons.

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