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What the Jobs Report Means for Interest Rates

Getting What You Pay For

June 2013: What's Hot and What's Not

Dividends: Love'm or Leave'm

Who Dun it?

What the Jobs Report Means for Interest Rates

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David Blitzer

Managing Director and Chairman of the Index Committee

S&P Dow Jones Indices

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The employment report released on July 5th showing 195,000 new jobs and the unemployment rate remaining at 7.6% increase the likelihood that the Fed will begin to slow bond purchases late this year, end bond purchases in mid-2014 and begin to raise the Fed Funds rate in 2015.  As explained on the Atlanta Federal Reserve’s blog the report is consistent with the Fed’s own projections.  Assuming job growth continues at about the pace seen in the last few months and that the labor force participation rate holds steady, unemployment would move to 7.26% in December 2013, 6.92% in mid-2014 and 6.25% in Mid 2015.

If this is correct, and if the Fed sticks to its current guidance about the Fed funds rate, the Fed Funds rate will remain in the current 0 to 25 bp range until sometime in the first half of 2015 as the yield curve steepens slightly until then.  The probable slowing of bond purchases most likely means further increases in bond yilelds over the next couple of years.  The implications for stocks and gold depend on the economy and inflation as well as the Fed.  If the economy does as well as the Fed expects, stocks should avoid a major set back.  Under the Fed’s outlook, with continued low inflation, gold won’t have much reason to reverse its recent decline.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Getting What You Pay For

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Craig Lazzara

Managing Director and Global Head of Index Investment Strategy

S&P Dow Jones Indices

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Today’s Wall Street Journal, among others, reported on a recent study by the Maryland Public Policy Institute arguing that the public pension funds which pay the highest fees haven’t reaped the highest investment returns.  In fact, the study shows, it’s just the opposite — for the 5 years ended June 2012, the 10 states which paid the lowest fees outperformed the 10 states which paid the highest fees.

This conclusion is reminiscent of a 2010 Morningstar study of mutual fund returns, which showed that low expense ratios were strong predictors of fund performance.  If fees and expenses are not predictive of returns, it follows that in the investment management world “you get what you pay for” is wrong, at least in a general sense.  If you got what you paid for, expensive funds and managers would outperform cheaper funds and managers.  If in fact it’s the opposite, that’s a powerful argument in favor of passive management.

None of this is news to readers of our SPIVA reports, which have demonstrated for years that most active managers underperform most of the time.  Passive management is not only a bargain — more often than not, it has enhanced returns as well.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

June 2013: What's Hot and What's Not

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Jodie Gunzberg

Managing Director, Head of U.S. Equities

S&P Dow Jones Indices

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Read about some commodity highlights in June from an interview with Courtney Nebons, our studio producer.  Click here to watch the video.

Q1.  This month we heard a lot about the Fed easing its monetary policy, so how did that impact commodities?

Commodities reacted negatively to the news that the Fed may ease its bond buying program since as the dollar strengthens, goods priced in dollars become more expensive for other currencies.  On June 20th, after the meeting all 24 commodities in the S&P GSCI fell, and the news sent Coffee, Nickel, Silver and Gold into bear markets for the year. Gold lost 12.2% in its worst month since January 1981.

Q2.  Was there anything else besides the quantitative easing driving down commodities this month?

The weather was an overarching theme, driving down grains and natural gas. Grains dropped 6.5% in June from adequately moist soil and larger than expected crop yields. The same mild weather also drove natural gas down 11% in June and is now at the same level as at the start of the year. At its peak on April 19 it was up 26.7% for the year from cold weather but as the weather warmed and inventories grew, the natural gas index gave up its gains.

Q3. Were any commodities hot like the weather?

In the index in June, livestock gained 3.1%, petroleum was up 3.0% and cotton was the big winner returning 7.8%.   Fundamentals were key to overriding the risk off declines from the quantitative easing.  For example, there is concern over a pig virus that may further curb production while meat-packers cut slaughter rates to offset tighter-than-expected seasonal hog supplies, which reduced the flow of pork to end-users at a time when demand heats up for summer vacations and outdoor cookouts.

Q4. Given crude oil is such a heavyweight, can you tell us briefly about the fundamental driver in that market?

WTI crude oil in the index was up 4.8% in June from the growing capacity to ship crude from the Cushing, Oklahoma delivery point in the U.S.

Q5. Is there anything else you would like to add?

Overall, the S&P GSCI was once again driven by the themes of the quantitative easing, Eurozone crisis, and Chinese demand. Although the quantitative easing and uncertainty over China’s demand were strong negative influences on commodities this month, the fundamentals prevailed pulling the index into positive territory, finishing up 23 basis points.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Dividends: Love'm or Leave'm

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Howard Silverblatt

Senior Index Analyst, Product Management

S&P Dow Jones Indices

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Now that the short-term speculators have left the dividend market, core investors can get back to their boring stocks, collecting their tax advantaged yield (you may not like the increase to 20% from 15%, but I remember when it was 70%, and that was before New York State, City or unincorporated business tax got hold of you – talk about a minority interest).  The linked dividend report below is on U.S. domestic common stock for Q2 2013, and shows another good quarter.  My takeaway for the S&P 500 is below:

I expect dividend growth in the second half for the S&P 500 to be less than the first half due to the large December 2012 payout which was inspired by tax concerns.

The numbers works out to an upper-single digit second half increase, putting the 2013 dividend payment gain into double-digit territory.

The expected 2013 payment would set a new record over the current 2012 record – a year which included significant accelerated payments from 2013.

2013 would be the third double-digit gain in a row; the record is 4, set in 2004-7 and 1947-50.

2014, as the Fed would say, is data dependent (economy).

http://yhoo.it/120LeYu

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Who Dun it?

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David Blitzer

Managing Director and Chairman of the Index Committee

S&P Dow Jones Indices

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Beginning in May and then aggressively following Fed Chairman Ben Bernanke’s June 19th press conference interest rates rose.  The yield on the 10 year treasury both led the way and spooked the markets world-wide.  Analysts raised the specter of an early end to QE3, cited Bernanke’s comments and hinted that the central bank was about to abandon the markets. Stocks responded with a sharp slide. Just as it seemed that all were united in castigating the Fed for bringing on the inevitable end to bond bull market, a counter attack was launched.

In the week and a half since the press conference, the Fed has put on a full court press with speeches from two Fed Governors and timely news stories pitching the idea that the rate rise was a case of premature market jitters. Why did rates rise? Some of the comments in Bernanke’s press conference reminded everyone that sooner or later QE3 would end and that, if the Fed’s economic forecast proved reasonably correct there would be no QE4.  While no one wanted to be reminded that QE3 would end; there were other factors in the press conference and the market.  Bernanke talked about beginning to taper off QE3 if the unemployment rate slipped into the neighborhood of 7%.  Some may have confused this with comments from a few months ago that the Fed Funds target would remain zero to 25 bp until the unemployment rate reached 6.5% . (It is 7.6%, at least until the next report on Friday morning). The Fed has two unemployment rate targets – one for QE3 and another for the Fed Funds rate.

More important than the double unemployment rate targets, the Fed confirmed both in the press conference and in those recent speeches that monetary policy will respond to the economy and that it believes the economy is beginning to improve.  The Fed’s own forecast for 2014 looks almost rosy at 3% to 3.5% real growth, at or above trend.  That growth, rather than monetary policy, will boost interest rates.

Who dun it? The number one suspect is the economy. As to the central bank, one might consider it an accessory before the fact – and offer a compliment for their success.

The posts on this blog are opinions, not advice. Please read our Disclaimers.