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The Beacon
 
market spotlight | monthly review
 

Monthly Review


November saw equities markets follow October’s gains, although not nearly at the same pace. Amid favorable jobs reports, moderate GDP growth, and increased consumer income, coupled with an apparent easing of economic concerns in China, conditions appeared ripe for a strong November in equities trading. However, the major indexes listed here saw gains that can be described as pedestrian at best. Possibly shaken by the terrorist attacks in Europe, investors socked money away at a pace not seen since 2012. Nevertheless, positive gains were achieved in both the Dow and S&P 500. The Nasdaq advanced almost 55 points, while the Russell 2000 jumped a little over 3.0%. Of the indexes listed, only the Global Dow lost value by the end of November.


At the close of November, the price of gold (COMEX) was $1,064.00, more than $77 lower than October’s end-of-month price of $1,141.70. Crude oil (WTI) prices remained below $45 a barrel, selling at $41.68 a barrel by month’s end.


Market/Index 2014 Close Prior Month As of 10/30 Month Change YTD Change
DJIA 17823.07 17663.54 17719.92 0.32% -0.58%
NASDAQ 4736.05 5053.75 5108.67 1.09% 7.87%
S&P 500 2058.90 2079.36 2080.41 0.05% 1.04%
Russell 2000 1204.70 1161.86 1198.11 3.12% -0.55%
Global Dow 2501.66 2436.23 2391.96 1.82% -4.39%
Fed. Funds .25% .25% .25% 0% 0%
10-year Treasuries 2.17% 2.14% 2.20 bps 6 bps 3 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

The Month in Review

Terrorism dominated the news in November following the bombing of a Russian passenger plane, and attacks in Paris and Mali. The economic impact of these terrorist attacks may not be realized for some time, as the United States and foreign nations work to protect their people while confronting threats of further violence.

The Federal Open Market Committee (FOMC) does not meet in November, but at its next meeting in December, FOMC members will assess whether economic indicators show sufficient upward movement to warrant an interest rate increase. November has proven to be a “mixed bag” of economic information, with some sectors showing clear improvement, while others are stagnant or regressing.

The second estimate of the third-quarter GDP showed continued expansion, but at a much slower pace compared to the second quarter. The second “advance estimate” of gross domestic product showed economic growth increasing at an annual rate of 2.1% compared to the second quarter’s growth rate of 3.9%. While source data used as the basis for this report may change over time, it provides evidence that the economic growth of the first and second quarters may be fizzling. The latest GDP figures may support FOMC members who think it’s best to keep interest rates at their current level.

The FOMC relies on the personal consumption expenditures (PCE) index as a source for determining inflationary trends. The PCE index for October reveals inflation is relatively stagnant–gaining $15.6 billion, or 0.1%–the same marginal gain as the prior month. Overall, personal income increased $68.1 billion, or 0.4%, and disposable personal income increased $56.8 billion, or 0.4%, in October, according to the Bureau of Economic Analysis. Wages and salaries increased $45.0 billion in October, compared to an increase of $2.5 billion in September. While consumers apparently have more disposable income, instead of spending it, they’re saving it at a rate of 5.6%–the highest level since December 2012. This trend may be a sign that consumers aren’t sure about the strength of the economy going forward.

As another indication of inflationary trends, the overall Consumer Price Index increased 0.2% in October, according to the Bureau of Labor Statistics. Over the last 12 months, the all items index increased 0.2% before seasonal adjustment. The index for all items less the more volatile food and energy components (the “core” rate) rose 0.2% in October, the same increase as in September. The 12-month core rate sits at 1.9%–close to the 2% target inflation rate sought by the Fed.

The U.S. Treasury report for October revealed a budget deficit of $136.5 billion for the month. This report is the first for the U.S. government’s fiscal year, which runs from October through September. The deficit for October 2015 is 12.2% higher than for October 2014. A significant gain in Medicare spending, up 9.8% from a year ago, contributed to the increased budget deficit. Nevertheless, the 2015 fiscal year ended on a good note as the deficit fell 9.2% compared to last year. U.S. retail and food services sales advance estimates for October were $447.3 billion, an increase of 0.1% from the previous month and 1.7% ahead of October 2014, according to the U.S. Census Bureau. Total sales for the August 2015 through October 2015 period were up 2.0%. However, excluding motor vehicles, retail and food sales were actually up only 0.2% in October from September, and 0.5% ahead of October 2014.

According to the Bureau of Labor Statistics Producer Price Index, U.S. producer prices for goods and services fell 0.4% in October, with prices for goods falling 0.4% and prices for services declining 0.3%. For the 12-month period ended October 2015, overall producer prices are down 1.6%–a record 12-month decline for this index.

Orders for manufactured durable goods (expected to last at least three years) reversed course in October from prior months–increasing $6.9 billion, or 3.0%, to $239.0 billion from a month earlier, according to the Census Bureau. Despite the latest figures, durable goods orders are down 4.2% year-to-date compared to the same period in 2014.

The Federal Reserve’s monthly index of industrial production fell 0.2% in October from a month earlier, following a 0.2% decline in September. Utilities (-2.5%) and mining (-1.5%) decreased, while manufacturing output actually increased–gaining 0.4% for the month.

According to the Labor Department’s Job Openings and Labor Turnover Survey (JOLTS), the number of job openings in September was little changed at 5.5 million compared to 5.4 million in August. The number of hires and separations was little changed at 5.0 million and 4.8 million, respectively. The job openings rate for September was 3.7%. While the rate of job openings remains consistent, so too is the quits rate (1.9%), an indication that workers aren’t too sure there’ll be other opportunities in the labor market if they leave their present positions.

Total nonfarm employment increased by 271,000 in October, up from 142,000 in September, while the unemployment rate fell to 5.0%, according to the Bureau of Labor Statistics. Over the past 12 months, the unemployment rate and the number of unemployed persons were down 0.7% and 1.1 million, respectively. The average workweek for all employees on private nonfarm payrolls remained at 34.5 hours in October, while average hourly earnings for all employees on private nonfarm payrolls rose by 9 cents to $25.20. Hourly earnings have risen by 2.5% over the year.

The Bureau of Economic Analysis reported that the goods and services deficit was $40.8 billion in September, down $7.2 billion from August. The September decrease in the goods and services deficit reflected a decrease in the goods deficit of $7.3 billion to $60.3 billion and a decrease in the services surplus of $0.1 billion to $19.5 billion.

Import and export prices continue to feel deflationary pressures. Import prices for goods bought in the United States but produced abroad fell 0.5% in October, after a 0.6% decrease in September, according to the latest report from the Bureau of Labor Statistics. Lower prices for both fuel and nonfuel imports contributed to the October decrease. October’s export prices for goods sold abroad but produced domestically were down 0.2% following a 0.6% drop in September.

In the housing market, new residential construction (housing starts) fell 11.0% in October to 1.06 million from the previous month, and 1.8% below the October 2014 rate. Sales of new single-family homes increased by 10.7% in October above September, but sales of existing residences dropped 3.4% in October to a seasonally adjusted annual rate of 5.36 million. Despite last month’s decline, sales are still 3.9% above a year ago (5.16 million). The median existing home price for all housing types fell in October to $219,600, a drop of $2,300 from the prior month’s median sales price.

In other developments, for the week ended November 21, there were 260,000 initial claims for unemployment insurance, and 2,207,000 continuing claims for unemployment insurance for the week ended November 14, yielding an insured unemployment rate of 1.6%.

The national average retail regular gasoline price dropped from $2.228 per gallon on October 26, 2015, to $2.094 on November 23, 2015–a decrease of $0.134.

Consumer confidence in the economy, which had decreased moderately in October, declined further in November. The index now stands at 90.4, down from 99.1 in October, according to The Conference Board Consumer Confidence Index®.

Eye on the Month Ahead

The big news for December focuses on the FOMC meeting and whether interest rates will be raised. Economic indicators have been mixed, so there’s no certainty as to how the committee will act.

Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes) and Barron’s (S&P 2014 total return); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprices.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. The U.S. Dollar Index is a geometrically weighted index of the value of the U.S. dollar relative to six foreign currencies. Market indices listed are unmanaged and are not available for direct investment.

 
 
did you know?

Past performance is no guarantee of future results; however, it is notable to consider what’s happened to equities in advance of relatively recent tightening cycles. Equities have proven to remain a solid portfolio holding in a rising-rate environment.

Tightening Period Dollar Change During Tightening S&P 500 Index Return During Tightening

1988-1989 11.3% 20.2%

1994 -12.7% 1.2%

1997 8.4% 15.1%

1999 – 2000 11.0% 15.3%


Source: Cornerstone Macro LP, April 4, 2014. Past performance is no guarantee of future results. An investment cannot be made directly into an index. (https://www.blog.invesco.us.com/what-happens-to-stocks-when-the-fed-hikes-rates/)


For more information about how rising interest rates interact have historically impacted the markets and how Beacon Capital Management capitalizes on these opportunities, download our white paper, “Rising Rates Do Not Threaten Equities.”


 
 
bright ideas
 

Ring in the New Year with Next-Generation Portfolios


As 2015 draws to a close, it is an American tradition to reflect on our wins and successes of the year and develop goals and resolutions for the year to come. Now is the time to consider locking in profits and harvesting losses for last-minute tax strategies as predictions begin to brew for 2016 markets. With the continuous ebb and flow of the market, it is important to consider next-generation investment strategies that can adapt and perform under volatile market conditions. Beacon Capital Management is dedicated to meeting the needs of investors, and this includes managing the risk associated with their investments on multiple fronts.


Market Volatility

Market volatility can result in significant loss, which can be made worse from: knee-jerk buy or sell reactions; over-exposure in a single market sector; or, holding on to an investment for too long and “hoping” it will recover, all the while the market continues on a downward spiral. To manage investments in today’s economy, our signature Vantage 2.0 portfolios take a three-pronged approach. First, we maximize diversification through an equal sector approach with automatic rebalancing, helping avoid over or under-exposure subject to market bubbles and bursts in times of volatility. Next, we implement our proprietary risk management strategy to limit downside exposure through automatic stop-loss triggers. By protecting a portfolio from double-digit losses, we help reduce the time needed for recovering and advancing with a market rebound to help maximize long-term returns. Finally, we maintain discipline, removing human emotion from all buy and sell decisions; we utilize a mechanical approach founded in scientific reason and Nobel-prize winning research.


The Efficiencies of Modern Technology

As a next-generation money manager, we embrace the power and efficiencies of technology that allow for us to mechanically implement our investment philosophy. To maintain diversification, we automate equal allocation rebalancing to help avoid sector-bubble over- or underexposure. Then, to minimize risks above and beyond what diversification can offset, our Vantage 2.0 portfolios utilize stop-loss triggers and buyback execution to remove equity exposure based on predetermined benchmarks. Similarly, in 2015 we have proactively introduced duration management features that limit fixed income allocation exposures in times of extreme interest rate volatility. Lastly, we use technology to test the historical performance of each of our portfolios. By knowing how each portfolio would have reacted under certain conditions in the past, we have a better idea of how it will react under different scenarios in the future. We are thankful that we can use modern technology in each of these ways to help minimize dramatic losses during volatile market periods while working to capture gains.


Interest Rate Movements

With last week’s increase in interest rates by the Federal Reserves, and great anticipation for additional raises by March of the New Year, including a proactive component to your investment strategy with interest rate sensitivities will continue to be a key consideration in 2016. This in mind, Beacon introduced duration management functionality to the Vantage 2.0 portfolios in 2015. Similar to the stop-loss functionality for equities within these portfolios, when the benchmark index drops a predetermined amount, the duration of the bond portfolio will be reduced by shifting all holdings to short-term bonds. Clients’ bond holdings will be restored to their normal allocation once the benchmark has rebounded. The longer it takes the benchmark to reach its bottom, the more confidence we need to add intermediate- and long-term bonds back to the portfolio.


Hidden Fees

Often a hidden termite within an investment portfolio, investment expenses and management fees can erode the long-term performance for an investor. Vantage 2.0 portfolios utilize exchange traded funds (ETFs) to keep internal expenses low. Additionally, by not trying to beat or time the market, our efficient, mechanical investment management style keeps transactional costs to a minimum, ultimately working to maximize long-term returns for investors.


The Bottom Line to Successful Investing

To help ensure your investments remain on track in 2016 no matter the market or interest rates may bring, now is the time to evaluate your investment philosophy and risk tolerance to ensure your portfolio is equipped to meet the challenges and opportunities of the New Year. For more about Beacon’s next-generation portfolios, contact your advisor or visit www.BeaconInvesting.com today.


 


 
 
beacon news

New Year – New Look! We are excited to announce a new BeaconInvesting.com website with additional tools and resources for Beacon Advisors in 2016. Keep an eye on your inbox for more details in the days ahead.


 

FOR ADVISOR USE ONLY, NOT TO BE USED WITH CLIENTS.

Beacon Capital Management, Inc. is an investment advisory firm registered with the Securities and Exchange Commission. Additional information about Beacon Capital Management is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 120641. Beacon Capital Management only transacts business in states where it is properly registered, or excluded or exempted from registration requirements.

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