The Rattling of Tapers and Sabers

Talk of tapering the Fed’s $85 billion monthly purchase of bonds and saber rattling over the claimed use of chemical weapons on civilians by Syria’s government put a damper on stocks in August and risks worsening our struggling economy.

During the month, the Dow fell 5.1%, the S&P 4%, and the total market as measured by our VTI exchange fund, fell 3.6%. Treasuries declined during the Fed’s and investors’ taper talk and they rallied during the more recent war talk. The result for the month is a decline of only 0.4%.

Consumer spending, which amounts to 70% of the US economy, rose only 0.1% in July after a 0.6% increase in June. The decline was blamed on the slowing growth of income, weak job growth, and declining confidence.

The Conference Board’s consumer confidence report showed only a slight increase this month (81.5 from 81). August talk of war and a declining stock market will probably drag confidence lower for the month, but the strong housing market may keep confidence from dropping too far.

The Case-Shiller 20-city home price index, which comes a month behind other housing reports, was up 0.9% in June verses an average monthly gain of 1.4% from January to May. Price appreciation in homes is strong according to the report, but a bit less so than earlier in the year. It was noted that monthly declines have been popping up in the data for the first time this year, however isolated and small so far.

Prices for existing homes are strong and remain a major confidence booster for homeowners. The recent rise in mortgage rates could ultimately spur potential home buyers, anticipating even higher rates, to move sooner. But that is not currently the case according to the latest data.

The pending home sales index, which offers an early signal on final sales of existing homes, was down 1.3% in July, according to the National Association of Realtors and Econoday. Pending sales also fell in the June report, down 0.4%.  Econoday notes that it takes up to two months for pending sales to close which means this report points to trouble for final sales in both August and in September. The Mortgage Bankers Association also reported that mortgage rates increased further this month.

Manufacturing has been slowing these past several months and the trend continues with the latest data. New factory orders for durables (goods made to last more than 3 years) in July dropped a huge 7.3% after jumping 3.9% the month before. The transportation component fell a monthly 19.4%, following a spike of 11.7% in June. Excluding transportation, durables orders dipped 0.6% after a rise of 0.1% in June.

Regional Fed reports show slowing in the New York area, the Mid-Atlantic and in Texas but a slightly better pace in the Kansas City area and a much improved pace in the Richmond region. Manufacturing has been THE stalwart of this recovery. While the growth trend is slowing, it continues to contribute strongly.

Similarly, corporate profits were good in the second quarter, but not great. They were up 5.8%, compared to 3.5% in the first quarter.  Profits increased an annualized 10.6% after dipping 2.6% in the first quarter.

The government revised its estimate of second-quarter growth of the economy for its first of two. They raised it to an annualized rate of 2.5% compared to their initial estimate of 1.7%. The substantial upward revision to GDP growth was mainly due to a sharp upward revision to net exports, according to Econoday.

Whether the economy is growing at 1.7% of 2.5% really doesn’t matter. It is just not growing fast enough to create jobs and stimulate businesses and consumers to invest and spend at rates needed to lift us out of this malaise. War with Syria and the ensuing friction with China certainly will not help, nor will the upcoming battle in Congress to raise the debt ceiling.

So it seems we will continue, as we have for years, bumping along at 1.5% to 2.5%, until some major event removes the lid or the floor. Rather than predict the answer, we encourage you to ask yourself: Do I have too much risk in my portfolio given the danger signs ahead? Do I have sufficient hedge to blunt the downside? Do I have enough growth potential to confidently meet my long term needs?

Our best advice if you don’t know the answers to these questions is to let us create a financial life plan that describes all you hope to accomplish, stress test and adjust it for confidence, and allow it to do the investment driving, not your emotions, that are likely getting a little edgy about now.