Download Weekly Advisor Analysis 11-18-13 PAA

Weekly Advisor Analysis
November 18, 2013
Stocks Extend Winning Streak
For six consecutive weeks, the S&P 500 has marched forward with little obstruction. The index
finished last week at an all-time closing high of 1798.18 and the 1.6 percent gain last week
extends the year-to-date return to over 26 percent. Over the last twelve months, the S&P 500 has
increased more than 32 percent. Investors found solace in improving economic data and testimony
from Janet Yellen, who is widely believed to soon become the Chairwoman of the Federal
Reserve.
Source: Yahoo! Finance
Yellen Defends Quantitative Easing
When Ben Bernanke’s current term as Chairman of the Federal Reserve concludes at the end of
next January, Janet Yellen appears to be well on her way to assuming the position. Last week,
Yellen participated in a confirmation hearing where she showed clear support of the programs the
Federal Reserve has put in place over the last several years. Most importantly, she continued to
stress she intends to keep current Federal Reserve policy in place until the U.S. economy has
shown clear signs of robust growth as long as inflation continues to also remain reasonable.
Although we can’t be sure what robust economic growth looks like exactly, we have heard in the
past the Federal Reserve has a tentative target of 2 percent inflation. Based on data which is
depicted below, inflation has been registering lower than this target for a considerable period of
time. This has allowed the Federal Reserve more flexibility to continuing its efforts to support
economic growth without the negative side effects some have feared may accompany such loose
monetary policy.
What is Inflation?
We can’t know what a robust economy will look like exactly in the eyes of the Federal Reserve,
but we can get an idea of what will get us closer to 2 percent inflation. Interestingly, as depicted
below, about 40 percent of inflation as calculated by the Consumer Price Index, or CPI, is tied to
housing, according to the Federal Reserve. However, the calculation doesn’t include the prices of
homes sold; rather, it monitors rental prices or the equivalent of what an owner of a home might
pay in rent. Typically, when mortgage rates are low and housing prices are also declining, which is
exactly the environment we’ve experienced following the financial crisis until recently, rental
inflation isn’t high as there is excess vacancy and an incentive to purchase homes rather than rent.
However, if recent trends such as rising mortgage rates and a declining supply of rentals continue,
we could see an uptick in the housing portion of the CPI calculation.
Manufacturing Activity Accelerates
In another sign the government shutdown did little to impede overall economic activity, the
Federal Reserve indicated last week that production at U.S. factories advanced 0.3 percent in
October which was better than expectations, according to Bloomberg. Details within the report
highlighted that increased output of furniture, metals, and electronics signify a wide distribution of
healthy activity across many sectors of the economy. Despite this strengthening data, however,
most experts continue to predict no changes will be made to Federal Reserve monthly asset
purchasing program until March 2014, according to Bloomberg.
Best regards,
UDB Financial
Securities offered through LPL Financial, Member FINRA/SIPC.
* This newsletter was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the
named broker/dealer.
* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be
representative of the stock market in general.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific
periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to
predict future performance.
* Past performance does not guarantee future results.
* You cannot invest directly in an index.
* Consult your financial professional before making any investment decision.
Sources:
http://www.cnbc.com/id/101201974
http://www.bloomberg.com/news/2013-11-15/u-s-stock-index-futures-little-changed-before-data.html
http://money.cnn.com/data/markets/sandp/
http://chart.finance.yahoo.com/z?s=%5eGSPC&t=5d&q=&l=&z=l&a=v&p=s&lang=en-US&region=US
http://www.latimes.com/business/money/la-fi-mo-janet-yellen-federal-reserve-senate-confirmationhearing-20131114,0,4056319.story#axzz2kudBM5JM
http://perspectives.pictet.com/wp-content/uploads/2013/06/Fed-20.06.2013-2-550x311.jpg
http://useconomy.about.com/od/economicindicators/p/CPI.htm
http://useconomy.about.com/gi/o.htm?zi=1/XJ&zTi=1&sdn=useconomy&cdn=newsissues&tm=89&f=11&
tt=11&bt=4&bts=4&zu=http%3A//www.bls.gov/cpi/cpifact6.htm
http://www.federalreserve.gov/Pubs/FEDS/2004/200450/200450pap.pdf
http://361capital.com/wp-content/uploads/2013/10/RenMac_web-10-21-13.jpg
http://www.bloomberg.com/news/2013-11-15/factory-production-in-u-s-rose-more-than-forecast-inoctober.html
http://www.capitalspectator.com/indpro.11nov2013-thumb.gif