March 29, 2023

Dow Hits 3rd New High, Helped by Jobless Report

The stock market rose slightly on Thursday, pushing the Dow Jones industrial average to a new nominal high after it surpassed its previous peak two days ago. The gains came after a new report provided evidence that hiring was picking up.

The Labor Department reported that the number of Americans seeking unemployment benefits fell by 7,000 last week, driving the four-week average to its lowest point in five years. The drop in new jobless claims is a positive sign ahead of Friday’s employment report.

The Dow industrials rose 33.25 points, or 0.2 percent, to 14,329.49. The Standard Poor’s 500-stock index gained 2.80 points, or 0.2 percent, to 1,544.26. Both indexes rose for the fifth consecutive day.

The S. P. 500 is closing in on its own high close of 1,565.15, which was reached on Oct. 9, 2007, the same day as the Dow’s previous peak. The S. P. 500 would need to rise 20.89 points, or 1.4 percent, to set a nominal record, though both indexes are still far below their peaks if inflation is taken into account.

Investors have been buying stocks on optimism that employers are slowly starting to hire again and that the housing market is recovering. Growing company earnings are also encouraging investors to enter the market. The Dow is 9.4 percent higher so far this year and the S. P. 500 is up 8.3 percent.

“If you have a multiyear time horizon, equities are an attractive asset, but don’t be surprised to see some volatility, especially after the big run we’ve had,” said Michael Sheldon, chief market strategist at the RDM Financial Group.

The Nasdaq composite index advanced 9.72 points, or 0.3 percent, to 3,232.09. It is up 7 percent this year, but it is well below its high of more than 5,000, reached during the dot-com boom in 2000.

Boeing helped lead the Dow higher on Thursday, advancing $1.97, or 2.5 percent, to $81.05 after reports that American regulators were poised to approve a plan within days to permit the company to begin test flights of its 787 Dreamliner jet. The 787 fleet has been grounded since Jan. 16 because of safety concerns about the plane’s batteries.

Jeffrey Saut, chief investment strategist at Raymond James, predicted that any sell-off in stocks might be short-lived as investors who have missed out on the rally since the start of the year jump into the market.

“The rally is going to go higher than most people think,” Mr. Saut said. “This thing has caught most money managers flat-footed.”

The stock market’s rally this year has been helped in no small part by continuing economic stimulus from the Federal Reserve, which is buying $85 billion each month in Treasury bonds and mortgage-backed securities. That has kept interest rates near historical lows, reducing borrowing costs and encouraging investors to move money out of conservative investments like bonds and into stocks.

On Thursday, however, interest rates moved higher in the bond market. The price of the 10-year Treasury note fell 16/32, to 100 2/32, while its yield rose to 2 percent from 1.94 percent late on Wednesday.

Among the stocks making big moves, PetSmart fell $4.37, or 6.6 percent, to $62.18 after the company reported its fiscal fourth-quarter earnings. Profits for the pet store chain rose, but its forecast for this year disappointed investors.

Pier 1 Imports fell 96 cents to $22.28 after the company issued an earnings forecast that was below Wall Street analysts’ estimates.

The supermarket chain Kroger rose 89 cents, or 3 percent, to $30.25 after the company’s fourth-quarter profit handily beat Wall Street expectations.

Gap rose $1.41, or 4.1 percent, to $35.87 after it said a crucial revenue measure rose more than expected in February, helped by sales at its Gap and Old Navy stores.

Article source:

Economix Blog: Forecasting Unemployment

The unemployment rate for September surprised economists by dropping to 7.8 percent – the lowest rate since early 2009 – from 8.1 percent. But where will it go in the next month?

According to two economists with an innovative and impressively accurate new forecasting model, the answer is: nowhere. Expect the unemployment rate to stick pretty much where it is for months. And they say that with unusual confidence for forecasters, too.

Source: Brookings Institution

The economists, Regis Barnichon of the Barcelona Graduate School of Economics and Christopher J. Nekarda of the Federal Reserve, presented their new model in the Brookings Papers on Economic Activity series last month.

It is about 30 percent more accurate than other models on a three-month time horizon and performs especially well in the tricky times when the economy is in a recession, or turning around.

Here’s how it is different. Many unemployment-forecasting models rely on estimates of economic growth, or other macroeconomic data. But the Barnichon-Nekarda model looks at labor force flows, like the number of workers becoming unemployed, leaving the labor force and entering the labor force.

Let’s give an (extremely simplistic) example to show why the measure might be more precise.

Let’s say, for instance, that the pace of economic growth declined. A traditional model might predict that the unemployment rate would rise, with employers picking up fewer workers on the expectation of lower sales.

But let’s say that as growth declined more young people elected to stay in school and more workers in their 60s decided to retire. The labor force would shrink, meaning the unemployment rate might stay steady.

The Barnichon-Nekarda model might capture that near-term churn in the labor market more accurately than the traditional model – letting it more accurately forecast the unemployment rate.

So what does the Barnichon-Nekarda model tell us about September’s surprising drop? Don’t be so surprised, in essence.

“Unemployed individuals found jobs at a higher rate than in the previous month,” Mr. Barnichon writes in a blog post over at Brookings. “The rate at which workers lose jobs and enter unemployment also displayed a large unexpected drop. Consequently, the large unexpected drop in unemployment owes to very strong hiring and few layoffs.”

And what does the forecast see going forward?

Well, the economists do not foresee a correction to a higher unemployment rate in the coming months, given the pace of workers getting hired and fired. But they do not expect the rate to keep dropping – not at the pace of the last month, and really not at all. Much as the unemployment rate stubbornly stuck between 8.1 and 8.3 percent for most of this year, the economists see it sticking around 7.7 to 7.8 percent into the spring.

Article source:

Your Money: Resisting the Urge to Run Away From Home

Here’s a bad idea that’s likely to occur to the fight-or-flight animal within all of us: Scale way back on stocks in parts of the developed world with economic woes and put the proceeds someplace far, far away, in emerging markets stocks or gold or foreign currencies.

It’s clear why this is tempting. After all, there are too few grownups at all levels of government who are willing to both scale back programs and raise the taxes we need to pay for them. Meanwhile, in Europe, it seems that with each passing week another country is at risk of not being able to make good on its debt.

If you’ve lived through these swoons before, however, you know that few knee-jerk investing strategies born of uncertain times prove to be anything but total bunk. But this particular bit of lunacy is useful for the question it raises about the optimal amount of money to bet on your own country. The answer: leave more at home than your animal instincts would suggest right now.

Let’s start with a few givens. First of all, no parking money on the sidelines. You will read a lot about “investors” going to cash, but they are among a couple kinds of people.

There are professionals, who aren’t investing for the long run. Then, there are individuals who don’t realize that most investors who bail out end up selling at low prices and getting back in again after prices have spiked. Most of us should be the third kind of investor, the one who rebalances by selling the winners in well-balanced portfolios and buying the losers after large percentage declines.

The second given is this: we believe in stocks. For those of us who have a time horizon longer than a decade or two and lack a trust fund or a fat pension, a portfolio made of anything other than a hefty proportion of stocks stands a good chance of not earning enough over time. Low returns necessitate unpleasantries like doubling savings, working much longer or living on less in retirement.

And a third given: we’re talking about index or other passively managed mutual or exchange-traded funds here. Tracking individual stocks requires too much work and adds too much risk of underperforming the various market indexes.

As for whether you should run scared from your investments in the United States and Europe, the most natural initial question is this: Why bother investing outside of these regions when global markets seem to move in tandem?

There are three reasons. While it is true that global markets move up and down together with more similarity than they used to, returns are not identical either. As a result, owning stocks around the world should decrease your overall volatility, which can help returns.

Second, there’s currency diversification, which helps at times like these when the American dollar is weak. And finally, there is industry diversification in things like manufacturing, which you don’t get as much of from some developed-market companies as you used to.

While our hair-trigger strategy from up above suggests that familiarity with the United States and much of Europe ought to breed contempt with their stocks now, the reverse has historically been true. Investors exhibit “home bias,” owning a collection of stocks from their own country that is out of proportion to that country’s ranking in the global market.

In the United States, this results partly from our smug feeling of singularity in general. But it may also be a comfort thing. “They know Wal-Mart, but when you show them Petrobas or a company with another funny sounding name, there is some uncertainty,” said Mike Palmer, a principal with the Trust Company of the South in Raleigh, N.C. “People like certainty in their investment portfolios. But we don’t know where the next Wal-Mart is.”

In fact, American investors exhibit the least amount of home bias on earth according to academic research by three professors, Sie Ting Lau, Lilian Ng and Bohui Zhang. (The homebody awards go to investors in the Czech Republic and Peru.)

Still, the professionals in the United States who move the most money around tend not to match the market exactly. The value of American stocks makes up roughly 40 percent of the world’s stock market, but you won’t find many target date mutual funds with 60 percent of their stocks in international investments.

Fidelity increased the international portion of its stock collection to just 30 percent in 2009. Vanguard followed suit in 2010. Even Dimensional Fund Advisors, a company built on academic research about the efficiency of markets, has just 40 percent or so of its stock money in international securities in its mutual funds that allocate assets for investors.

Why not match the 60 percent allocation that truly represents international stocks’ share of all stocks on earth?

Vanguard notes that the higher expenses of investing outside the United States can affect returns. Dimensional points to taxes — some countries withhold them and that can reduce returns for many American investors.

Rick Ferri, author of “All About Asset Allocation” and founder of the money management firm Portfolio Solutions, has had his clients’ international stock allocations fixed at 30 percent for 12 years. He notes that given all of the business that American companies do outside the country, anything more than 30 percent may not reward you with the returns you’d want as compensation for the fact that many emerging markets stocks bounce around more than others.

That said, emerging markets stocks have returned a bit more than others historically in exchange for their wild swings. So wouldn’t now be a good time to make a big bet on their stocks? Or certainly their currencies, since the dollar may remain weak?

“If you’re certain that the dollar has to go down from here, the market is going to be aware of it and account for all of those beliefs already,” said Chris Philips who works in Vanguard’s investment strategy group. “You’re going up against hedge funds and professional traders.”

And even if you have a bright idea before they do, betting on countries is tricky. Consider a Dimensional Funds commentary that’s been making the rounds among the calm and the rational recently. (I’ve linked to it from this sentence in the online version of the column.)

The article notes that ratings agencies ranked Indonesia’s sovereign debt in the junk category for all of the last decade, though it has improved some over that time. Despite the supposed uncertainty, however, its stock market’s total return has been 33 percent per year in dollars.

There are probably not a lot of people who made big stock bets in Jakarta, though. There are even fewer, if any, anywhere on the planet, who found all the Indonesias and can pick them again in the future.

And that’s why humble investors spread their bets around the globe, avoiding both home bias and the kind of home-country self-hatred that times like these can too easily breed.

Article source: