With Memorial Day just days away, winter's economic potholes are in the rearview mirror. Looking over the dashboard for the unofficial start of summer, can we expect a good ride for the economy -- or will we be stuck in something more like a traffic jam?
Most experts think the economy will turn in a better showing during the current quarter. The upcoming economic readings may help to show whether things are on course.
This week's road map
Reports due this week include:
- The Federal Reserve releases minutes from its most recent meeting, Wednesday at 2 p.m. (All times Eastern.)
- The Commerce Department reports on April existing home sales, Thursday at 8:30 a.m.
- The Conference Board reports on the index of leading indicators for April, Thursday at 10 a.m.
- The Commerce Department reports on April new-home sales, Friday at 10 a.m.
Will stocks keep flying high?
Major stock averages have been soaring to new records. Will Wall Street keep fattening your 401(k)?
Mark Hamrick: From Bankrate.com, this is "Your Money This Week."
I'm Mark Hamrick in Washington.
Time for a mid-year look at the financial markets. We chat with two terrific guests, Michael Farr, who runs Farr, Miller and Washington, a money management firm in Washington, D.C., and Liz Ann Sonders, chief investment strategist for Schwab.
Between this year's midterm elections and record highs for the stock market, there's so much to talk about with the goal of helping you to make the best decisions for your finances.
All of that and more coming up on "Your Money This Week."
For our first segment, we turn to the West Coast -- specifically, San Francisco, home to the headquarters of Charles Schwab. Liz Ann Sonders has worked for Schwab since 2002 and is chief investment strategist.
To begin, I asked Liz Ann whether record levels in the stock market are sustainable.
Liz Ann Sonders: So the unanswerable question of course. I think -- I would like to see a bit more of a pullback than what we saw earlier in the year from mid-January to early February, as being pulled back by about 6 percent. And obviously, there have been subsets of the market recently that have pulled back further, but it has not affected the broad market. The only thing that troubles me really in the short term is that sentiment is still a little bit complacent. So I think something a little sharper than what we saw earlier this year, I think, would go a long way in healing some of that excess optimism.
Leaving that aside, I think we are still only in the middle innings of what I believe is a secular bull market that started five years ago. So, beyond the very short-term need maybe to further consolidate some of the recent gains, I think we are in good shape.
Mark Hamrick: And you have said, in one of your reports recently, that history suggests that this point in the calendar could be a tough period for stocks. Why is that?
Liz Ann Sonders: Well, it is not in the calendar, the whole notion of "sell in May." But it is a midterm-election year. And I do not tend to put a lot of stock in any one seasonal or election cycle indicator. But for what it is worth, midterm-election year tendencies are quite powerful. So every midterm election year since 1962, and including 1962, has seen the market give back a decent amount. The average correction within midterm-election years is 19 percent.
Mark Hamrick: And with the Dow and the S&P hitting new highs, representing of course, 30 and 500 stocks, respectively, how has the broader market been faring Liz Ann?
Liz Ann Sonders: So small-caps have not done as well, nor has the Nasdaq, so that you are seeing a particularly wide historic divergence between other segments of the market, notably the Russell 2,000 and the Nasdaq, both down somewhere in the 5-to-6 percent, year-to-date, where the S&P is obviously up.
Now, there is a big debate as to what that suggests, looking forward. Some suggest that the smaller-cap stocks are leading indicators of what larger-cap stocks will do, and therefore the weakness there is a harbinger of negative things to come for the larger-cap indices. But I have looked back at this in history, and I would say it is no worse than a mixed bag.
There have been nearly equally the number of instances where you get a broad divergence like that. And it narrows by the smaller-cap and Nasdaq names catching back up to the larger-cap names. So it is no guarantee that this weakness suggests coming weakness for the large-cap. So then, looking at it fundamentally, not just trying to use history as a guide, I do believe what is more likely to happen, is you see a pick-up in momentum in some of those areas that have been particularly hard-hit over the last month or two. I think it was necessary, because although I do not believe we have anything resembling a bubble in the broad market, you could argue we had bubble-like valuations in certain micro subsets of the market, a lot of smaller companies: biotech, some of the emerging Internet. And we have seen pretty sharp corrections there. It may not be over yet, but we may be getting closer to the point where you can start to see broader participation within the market.
Mark Hamrick: So I began with a bit of a tough question, I will end with one as well, Liz Ann, and that is: As you look out in the market environment right now, what is it that worries you the most, or perhaps is the biggest risk that investors are not paying enough attention to?
Liz Ann Sonders: So, I think there is the geopolitical piece of this, which is, sort of that ever-present risk that is almost impossible to quantify and certainly impossible to judge from a timing or magnitude perspective. So I think that is always there. More fundamentally and domestic in nature, I would say, I do not think it is a significant risk, but it is something that ought to be on our radar screen. When the Fed first started quantitative easing, there was this view that inflation was an accident waiting to happen when you pump that much money into the financial system -- people assumed it would be hugely inflationary. And that, in turn, has not been the case, because there has not been a lot of lending growth, so the velocity of money, as it is called, has been very weak. And that is not an inflationary environment.
But now, because inflation has been absent for long, and so few people are worried about it -- i.e. the "expectations bar" is pretty low -- I think you may want to put on your radar screen some of those inflation indicators. Wages are picking up, capacity utilization is up, lending growth is up, and although I do not think we have an inflation problem coming, we could have an inflation scare. And I do not think that that is really in the mindset of investors right now.
Mark Hamrick: No, it has been a long time since we have had that in the United States. Liz Ann Sonders, terrific insight, thanks so much.
Liz Ann Sonders: Thank you very much, appreciate it.
Mark Hamrick: Liz Ann Sonders, chief strategist with Schwab. She spoke with us from San Francisco.
Be sure to check out Bankrate.com for interesting investing advice, the latest news and a wide range of investment calculators.
Along with being a terrific investor and keen observer of the financial markets, what Michael Farr also does very well is decipher what goes on here in Washington, D.C., and how it affects your finances, or not.
Michael is President of Farr, Miller and Washington, located just a few blocks from the White House.
As with Liz Ann Sonders, I wanted to begin with Michael Farr on the question of the strong showing for the financial markets, and whether it has surprised him.
Michael Farr: Mark, the markets have surprised me to a certain extent, but they have been surprising me for the past few years. I feel like this has been one of the most surprising and unpredictable periods that we have been through in my couple decades-plus of doing this.
The last year, stocks went up over 30 percent, there was no inflation, and bond yields doubled. I mean that is almost an impossible formula. So, to see markets essentially go sideways for the first four months of 2014, after a 32 percent run, is really welcome, as far as I am concerned. Sideways move after a 32 percent advance, now we are up a couple of percent -- I think that is terrific. And yeah, I am a little surprised, I keep -- I, like everybody else, expect a correction that just does not seem to come.
Mark Hamrick: How is the broader market faring with this advance in the key averages, from the standpoint of not everybody is only investing in, let us say, the Dow 30 and S&P 500?
Michael Farr: Well the broader market, of course, has kind of been keeping pace, some things better than others. We have seen the emerging markets not do quite as well. They advanced very strongly, they pulled back, and they seem to be kind of coming off a bottom again. But by and large, this rising tide has lifted most boats.
Mark Hamrick: Michael, one of the reasons why it is so terrific to have you is that your view is particularly welcomed universally, because you are sitting in Washington, D.C., and very often a keen observer close to the Capitol about what is happening there, whether it is a pleasurable thing to witness or not. With this midterm-election year, meaning that Congress is up for grabs and the presidential campaign begins in earnest before we know it, perhaps before we want it, does all that matter at all when we are looking at how to invest?
Michael Farr: Well, that is a great -- it is an interesting way you asked that question, Mark, because Washington matters a lot, Washington has become the financial capital of the world. I would always say that tongue-in-cheek with Larry Kudlow, and now I have really come to believe it. When the Federal Reserve has a balance sheet that has expanded to over $4 trillion, and we have seen over $5 trillion in deficit spending over the past six, six and a-half years.
I mean, Washington is creating a lot of money and having a whole bunch of influence on things like whether they do the Keystone Pipeline and pass that or not, and it looks now, like they are not going to do that this year, or even next year. I mean, that seems to have been shut down. That would make a big difference for energy prices, for instance. And bringing costs of energy lower, of course, means that consumers have to devote less of their budget for heating and gasoline, and then they can spend on other things, and that's stimulative of the economy. So that one piece of policy could affect us economically and therefore affect the markets.
I think the best part about your question, though, was to say: And what should investors be watching as Washington is doing this? Watch everything that they do in Washington, but do not get too upset or too worried about any of it. Washington is always making this level of Washington noise. That is kind of the way I think of it as Washington noise. Over the long-term, investors need to look for companies that are going to grow and expand. If you are an investor, you are looking at corporate America, if you are investing in corporate America, and companies like Johnson & Johnson and Google or United Technologies, or J.P. Morgan -- you are looking at this broad group of very large companies saying that over the next 10 years, I think corporate America is going to expand. I want to own a piece of those companies, and I know that there will be difficult times over that 10-year period, and Washington will do some great things, we hope, and probably some things we do not think is so great. I cannot worry about that, I need to worry about the price of my stock. So, in the fish market, they say ignore the screaming and yelling and pay attention to the price of fish. That is my advice about Washington, too.
Mark Hamrick: I like that, I like that very much. And Michael, to the extent that last year, let us say, Washington in general was seen as a significant, let us say, the federal government at least, comprising the administrative branch, executive branch and the Congress -- that was seen as really kind of a headwind for the economy. And now, it is seen as slightly more neutral. And obviously, you have to factor the Federal Reserve in there, which you just referenced that with the size of the balance sheet and so forth. Longer term, does the inability of Washington to grapple with significant problems concern you as an investor?
Michael Farr: Yes and no. Washington's headwinds last year were remarkable and were different, I mean pretty much in my lifetime. When the partisan bickering -- and the partisan agenda's really overwhelmed any of the meat of the legislative policy that was being considered. When government was shut down, and a couple of years before, where we saw the United States lose its sovereign debt rating from a AAA to a AA, all because these guys could not come to some middle ground. Yes, that is a concern.
Congress historically makes best policy when they have to find middle ground. So the standoff is a problem. I think that this, too, will pass, and I think we are seeing nothing ideal out of Washington, but I think they got the message that that lack of collegiality really damaged their interests, which really drives a lot of what they do. So it damaged their interests at home, it damaged I think the nation's interests and economic prospects. So, they are acting nicer, they are playing nicer out in the playground right now. We hope that that will continue, and I have hopes for continued collegiality, in spite of some of the louder voices.
These pendulums tend to swing back. Washington, you know, it is a little bit like Churchill, I believe, said that give the Americans -- after they have explored every other opportunity, they will do the right thing.
Mark Hamrick: We can only hope. We can at least hope that they do no harm, right Michael?
Michael Farr: In the long term, I do not think they will do harm. And in the long term, I think that this is still -- America is still the best place to form a business, to do business, to create and have commerce. We have great tax laws, we have an educated workforce, we have an entrepreneurial spirit and an American dream and contract laws. This is the right place for things to grow, no matter how we seem to keep tripping over ourselves along the way.
Mark Hamrick: I agree completely, Michael. I spoke with Elon Musk not too long ago, and he had a great line about innovation in the U.S. where he said we are the least worst at innovating. And he's obviously optimistic and very accomplished, like yourself. So, as always Michael, you are the best. Thank you so much for your time my friend.
Michael Farr: Thank you Mark very much for having me.
Mark Hamrick: Michael Farr, president of Farr, Miller and Washington. He spoke with us from his office in Washington.
There's an old saying, you can't fight City Hall. Leaving that question aside, what about a dispute with your bank? What to do when differences arise?
For some answers, we turn to Bankrate's Allison Ross.
Allison Ross: When it comes to customer service, the banking industry is certainly not top of the leader board. But there are steps you can take to try to ensure your problems are heard by your bank. I'm Allison Ross with your Bankrate Personal Finance Minute.
Recent research by the Carlisle & Gallagher Consulting Group finds that 1 in 3 bank customers has had a problem that's never been completely resolved. If you find yourself with a complaint against your bank, the first step to take is a deep breath.
After you're calm, do your homework by collecting relevant dates, account numbers and erroneous costs. When talking to a bank customer service rep, instead of getting upset or complaining, try asking them for their advice. If you aren't getting help, sometimes the best answer is to call back and get a different customer service rep.
If you've exhausted all other possibilities, take your notes and bring them to an outside agency like the Consumer Financial Protection Bureau.
For more ways to handle complaints with your bank and other personal finance tips, visit Bankrate.com. I'm Allison Ross.
This week in business history:
Before the Internet, before telephone lines, there was the telegraph. Lines through which messages were sent using Morse Code.
On May 24, 1844, inventor Samuel Morse sent the first known telegraph message from Washington to Baltimore with a line from the Bible: "What hath God wrought?"
The invention changed long distance communication, replacing delivery of messages which had been done by horses and rail.
You've been listening to "Your Money This Week."
For more on this and other personal finance issues, visit Bankrate.com. Thanks to producer Amanda Rowe.
I'm Mark Hamrick. From all of us here at Bankrate, here's hoping you have a great week.
Housing market deja vu
Remember when the state of the housing market was a key concern for the broader economy? We find ourselves back in that situation here in mid-2014, ahead of this week's home sales reports.
The housing market isn't being roiled by the same sort of crisis-causing economic tsunami as a few years ago, but there are still reasons to worry.
Last week's April housing starts report looked much better than expected, on its surface. But peel back the layers of the report and you find the strength was focused in "multifamily unit" homes. In other words, builders ramped up on apartments, not single-family homes.
"The flat single-family data confirm our latest surveys, which show that single-family builders remain concerned that tight credit availability and uncertain economic conditions are keeping potential buyers on the sidelines," says Kevin Kelly, chairman of the National Association of Home Builders, an industry trade group.
This week's dual readings on sales of new and existing (previously owned) homes could indicate whether the builders' concerns are justified.
Home prices are coming back, but that has been very much a "good news, bad news" situation. There's been progress in recapturing lost equity, and Americans who have owned homes are feeling better. But for those aspiring to become first-time homebuyers, the rise in mortgage rates and home values has been a double-edged cut.
Briefing.com chief economist Jeffrey Rosen says flatly: "The housing market is in a difficult situation."
The path forward is potentially difficult, Rosen says. "In order for sales to rise, affordability conditions will need to weaken. That means rates will need to come down (unlikely given the Fed tapering) or income will need to increase (unlikely given the slack in the labor market)."
An uncertain big picture
Meanwhile, while overall economic growth flat-lined during the first three month of the year, prospects for the current quarter are more positive.
Joel Naroff, chief economist with Naroff Economic Advisors, is in the camp that blames winter for the soft start to 2014. "We probably need another month to really have a good feel for the answer, but I am still on the side of weather being the major factor in the weak first quarter," he says.
Briefing.com's Rosen is slightly less certain that the weather's thaw has brought an economic lift. "We are currently forecasting roughly 2.5 percent GDP growth in the second quarter. We do not see any significant gains from weather-related, pent-up demand," he says.
That's just an example of how the economy's axle-breaking bumps over the past few years have left some observers with a dented outlook.
This week in business history: Dot-dash
The invention of the telegraph changed long-distance communication, offering a faster delivery of messages than by horses and rail.
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