Market Update Through 6/30/2014

as of June 30, 2014
Total Return
Index 12 months YTD QTD June
Stocks
Russell 3000 25.22% 6.94% 4.87% 2.51%
S&P 500 24.61% 7.14% 5.23% 2.07%
DJ Industrial Average 15.56% 2.68% 2.83% 0.75%
Nasdaq Composite 31.17% 6.18% 5.31% 3.99%
Russell 2000 23.64% 3.19% 2.00% 5.32%
MSCI EAFE Index 23.57% 4.78% 4.09% 0.96%
MSCI Emerging Markets 14.31% 6.14% 6.60% 2.66%
Bonds
Barclays US Aggregate 4.37% 3.93% 2.04% 0.05%
Barclays Intermediate US Gov/Credit 2.86% 2.25% 1.23% -0.07%
Barclays Municipal 6.14% 6.00% 2.59% 0.09%
Current Prior
Commodity/Currency Level Level
Crude Oil  $105.37  $102.71
Natural Gas  $4.46  $4.54
Gold  $1,322.00  $1,246.00
Euro  $1.36  $1.36

Mark A. Lewis

Director of Operations

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One Down, One to Go

There was much rejoicing among analysts, economic forecasters and financial market participants on June 6 when the BLS told us that total nonfarm payroll employment on a seasonally adjusted basis set a new record in May 2014 with 138,463,000 such jobs then. The old record of 138,350,000 such jobs on a seasonally adjusted basis was set in January 2008, which was the first full month of the 18-month long recession that began in December 2007 and ended in June 2009.

The chart shows the pattern of this widely followed economic series since January 1978. It is quite obvious that instead of the fairly quick recovery in such jobs that followed every recession from 1945 to the 1981-1982 one, the length of time to return to previous levels has gotten longer and longer with every recession beginning with the 1990-1991 event.

Capture

While many reports on this new record contained statements claiming that all the jobs lost in the recession had been made up, that is not technically true. What IS true is that the total number of jobs has now been matched. But tens of millions of actual jobs that disappeared in 2008-2010 will never come back. They have just been replaced by other jobs.

In addition to that, the total population and the labor force have grown a lot over this time frame. Some estimates are that we might need as many as five million more jobs today just to be even with how well off we were in January 2008 in terms of payroll employment.

It turns out that the pattern of nonfarm payroll jobs today is vastly different from what it was back in January 2008. Here are some of the comparisons.

By far the largest number of net new nonfarm payroll jobs over that period is found in the “health care and social assistance” category, which has risen by 2,150,000 such jobs. Next is “Accommodations and food services” with an increase of 941,000. “Professional and technical services” jobs have grown by 512,000. “Education services “has gained 425,000 jobs and “Temporary help services” has added 307,000 jobs since January 2008.

Not very surprisingly, the biggest loser is jobs in manufacturing. There were 1,650,000 fewer of those in May 2014 than in January 2008. This is hardly a new story. The peak was 19,553,000 jobs back in June 1979. The recent trough counted 11,453,000 such jobs, which was the lowest number since March 1941, well before the US became involved in World War II. The May 2014 level of 12,099,000 is still lower than in June 1941, both on a seasonally adjusted basis. No one expects to see a new record here for many years, if ever. It is a fact that total manufacturing output has soared since then. The Industrial Production manufacturing index was 10.5 (2007=100) then and 99.5 in May 2014. That shows how huge the labor productivity increases have been in manufacturing. The US has the highest levels of labor productivity in manufacturing in the world and also the highest average annual rate of increase in this critically important measure over the past 70 years.

The construction sector was still down 1,496,000 jobs in May 2014 from January 2008. The government sector lost 507,000 jobs over that period, but almost all of these were at the state and local level.

Consistent with this shift in the type of nonfarm payroll jobs over the past 6-1/2 years, it should not surprise you to learn that the number of nonfarm payroll jobs held by women has been above the old peak set in February 2008 every month since September 2013. There were 68,393,000 nonfarm payroll jobs held by women in May 2014 or 49.4 percent of all such jobs.

As a corollary to the still-missing millions of construction and manufacturing jobs, the total number of nonfarm payroll jobs held by men is still below the old peak. It will take several more months to see a new record for men holding nonfarm payroll jobs.

Of course, there are two different measures of employment. In addition to nonfarm payroll employment, we have total civilian employment, which includes the self-employed and agricultural workers. This measure counts each person only once, whereas the payroll survey does not adjust for people who have more than one payroll job.

Total civilian employment peaked in November 2007 with 146,595,000 people employed on a seasonally adjusted basis. In May 2014 there were 145,814,000 people employed, so there are still 781,000 fewer people employed than at the peak. There were 9,799,000 people who were unemployed and looking for work in May for an unemployment rate of 6.3 percent. We should see a new record in the next two or three months. Then we can celebrate the fact that we are in uncharted territory by both measures.

The June 10, BLS report on “Job Openings and Labor Turnover” (the JOLTS report) told us that on April 30 on a seasonally adjusted basis there were 4,455,000 unfilled job openings in the US. That was the highest since September 2007, before the recession began.

The report also said that there were 55.1 million hires in the twelve months ending in April 2014. There were 52.8 million job separations in the same period.

Thus, we had 107.9 million people changing jobs over 12 months in order to get a net employment gain of 2.2 million people. The US economy remains the most incredible “jobs machine” every seen.

 

Dr. James F. Smith

Chief Economist

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Gen Y, Say Yes to Stocks!

It started with anecdotal evidence: a conversation with a co-worker about a group of professionals he spoke to about their 401k. The wiser (by which I mean older) folks were asking about the outlook for the economy and how they could maximize their 401k contributions. But the young man in the group, who was in his early 30s, expressed complete contempt for the stock market.  All of his money, he said, was in cash. Then a client of mine who is nearing retirement called me just to tell me about a dinner he went to where the topic of investing came up.  He was shocked at how vehement the young people at the table were about not investing in stocks due to their risk.

Since then I’ve read about a growing body of evidence coming from surveys and other research that suggests that the younger generations are too conservative in their investments. Gen Y is saving but not investing aggressively enough. The problem is that they distrust financial institutions (we don’t count) and believe another financial meltdown is all but imminent.

Gen Y, we don’t blame you. You were in your teens on Sept. 11, 2001, which had to have rocked whatever concept of stability you had. By the time you were old enough to know what the stock market was, the technology-driven crash of 2001-2002 was causing strife in budding 401k plans. And just when you were starting to dream about home ownership the housing market was spiraling out of control in 2008-2010. Many of you watched your parents go through extreme financial duress during this time period, something you were well old enough to understand.

It’s no wonder that Generation Y is too conservative. Your generation doesn’t have the benefit of personally experiencing the roaring 80s and 90s to boost your confidence about the markets. You don’t know who Crockett and Tubbs are. Looking at historical stock returns on paper just isn’t the same as living through it. And it’s hard to understand why men ever wore over-sized shoulder pads, but they did. Even the last five (amazing) years of positive stock markets seems like mere payback for the horror of 2008-2009. Despite this, we have to remember that stocks have historically provided the highest long-term return. No matter what your steadfast beliefs are about the future of the economy, it probably carries no more predictive capacity than the next differing opinion. That’s why we look to history as a guide, rather than trying to guess the future.

When you look at stock volatility over long time frames, it isn’t nearly as risky as the day-to-day movement would have you believe. In the last 87 years large company stocks’ annual returns ranged from -43% in the worst year to +54% in the best. That’s quite a spread! But those same stocks in any given 20 year period (starting on any given day in any year) averaged returns in a range of +3% in the worst 20-year period to nearly +18% in the best 20-year period. That includes the Great Depression and the market crashes of this century. That’s a lot easier to swallow. You have a long time before liquidating your accounts for retirement – probably more than 30 years, so you should be taking a longer term view.

And let’s not forget about inflation. That cash that’s in your 401k is doing less than nothing for you. Long run inflation is around 3%. If you are getting a 0% return on your cash, that is actually -3% in real dollars, guaranteed.

Saving money isn’t good enough. Millennials need to invest with a little more oomph. Yes, diligently putting away $500 a month for 30 years is hard work and no one wants to see their money shrink. But consider this: if you get a modest 4% average return on those savings, you will have $347,000 in retirement; if you double that return to 8% an amazing thing happens: $745,000. Taking risk means a lot of ups and downs along the way, but potentially twice the money in the end. If you can go cliff-jumping with your friends, you can buy stocks, right? (No? Was that just my friends?)

There is no reward without risk, to be sure. Any investment plan should be done with the full comprehension of the volatility, range of outcomes and potential for return. There certainly is risk in losing money in the stock market over short and intermediate time periods. However, those losses only become permanent if you sell out during periods of decline. It seems all but certain that an all-cash/fixed income portfolio is doomed to growth too slow to possibly reach any long-term financial goals.

 

Harli L. Palme, CFA, CFP®

A Gen-exer who believes all of the above applies to her generation too, except the part about over-sized shoulder pads.

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Paralysis from Analysis

This month, I celebrate my 500th year at Parsec.  OK – it is really 22 years, but sometimes it feels like 500 years.

During that time, I have been involved in a lot of highly technical projects.  With one project in particular, I was really stressed out about the details.  I analyzed every piece of data so much that I made little progress.  Bill Hansen, one of our Managing Partners, said I suffered from “paralysis from analysis.”  After some reflection, I realized he was right.  At some point, I had to let go and realize nothing would ever be perfect.

In my lengthy career here, I have seen the effect of “paralysis from analysis.”  Some investors may be reluctant to act based upon the endless stream of information available now.  One can flip on the TV at any hour and hear the opinions of investment commentators.  Peruse the Internet, and one can find a vast amount of data about the stock market and the economy.  With so much information and contradictory opinions, it is easy to sit on the sidelines and do nothing.

In some cases, inaction can be as devastating as making the wrong choice.  Consider this scenario.  On March 9, 2009, the S&P 500 hit bottom.  A lot of people panicked and sold all holdings, leaving the proceeds in cash.  Five years later, the index was up 205.84 percent or 22.6 percent annualized (total return).

At the bottom point, there were probably a few people on TV who claimed the end was near.  One could probably find endless charts and articles foretelling great doom to come.  If an investor was paralyzed by this data overload, sat on the sidelines, and did not invest during that five-year period, he or she could have missed an opportunity to recover from deep losses.

What should a person do?  For starters, it helps to leave emotion out of the decision as much as possible.  Then, develop an investment plan that will not lead to sleepless nights.  The real test will come when the market has wild swings – either up or down.  One must commit to the plan and not deviate based upon the mood of the moment.  It is fine to alter the plan if goals or needs have changed, of course.

We at Parsec try to help our clients develop these plans and weather the inevitable market fluctuations.  Communication is a key factor in success.  We encourage our clients to tell us their goals, their changing life situations, or anything that is relevant to staying on target.

So, let’s switch off the talk shows, put down the business magazine, and take a nice walk.  Let’s try to enjoy life instead of obsess over every little detail.

Cristy Freeman, AAMS®
Senior Operations Associate

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Market Update Through 3/31/2014

as of March 31, 2014
                                                              Total Return
Index 12 months YTD QTD March
Stocks
Russell 3000 22.61% 1.97% 1.97% 0.53%
S&P 500 21.86% 1.81% 1.81% 0.84%
DJ Industrial Average 15.66% -0.15% -0.15% 0.93%
Nasdaq Composite 30.18% 0.83% 0.83% -2.45%
Russell 2000 24.90% 1.12% 1.12% -0.68%
EAFE Index 15.88% -0.18% -0.18% -0.43%
 
Bonds
Barclays US Aggregate -0.10% 1.84% 1.84% -0.17%
Barclays Intermediate US Gov/Credit -0.13% 1.00% 1.00% -0.30%
Barclays Municipal 0.39% 3.32% 3.32% 0.17%
 
  Current Prior
Commodity/Currency Level Level
 
Crude Oil $101.58 $98.89
Natural Gas $4.37 $4.43
Gold $1,283.80 $1,379.00
Euro $1.37 $1.39

Mark A. Lewis

Director of Operations

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Happy 5th Anniversary, Bull Market!

That’s right, it’s the Wood Anniversary for the market, which hit bottom on March 9, 2009. Since then, it has come roaring back – the S&P 500 is up 174% for the 5-year period (that’s price change only, not total return). Not too shabby.

The WSJ has a nice article here showing the anniversary in five charts. According to one of the charts, this rally is the second-best since WWII (beaten only by the S&P’s 228% gain from 10/82 through 10/87). The article’s author thinks there is still room to go in the market recovery, saying that investors’ confidence in the rally will continue to fuel stock market inflows.

No one knows what the future will bring where the market is concerned, but the present is a far cry from five years ago. Happy Friday, happy bull market anniversary, and here’s to five more years!

Sarah DerGarabedian, CFA
Portfolio Manager

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North Carolina Tax Law Changes

After months of grappling with members of the state’s legislature, Governor Pat McCrory signed a bill authorizing the most significant changes to North Carolina’s tax code since the 1930s on July 15.

The new tax code reduces both personal and corporate income taxes and eliminates the estate tax. Early estimates indicate that taxpayers across the board will pay less in state taxes once the changes go into effect. Some of the other key provisions of the new law are:

• Deductions for mortgage interest on first homes will be capped at $20,000.
• Charitable contributions will remain fully deductible.
• The child tax credit will continue
• Social Security income will remain exempt from state taxes.
• The corporate tax rate will be cut from the current 6.9 percent to 5 percent by 2015.
• North Carolina’s gas tax will be capped until June 30, 2015.
• A deduction on retirement income is eliminated.
• Starting in 2014, the sales tax holidays for back-to-school and Energy Star products are eliminated.
• The deductibility of the first $50,000 of business income has been eliminated
• Service contracts will be subject to sales taxes
• Electricity will be taxed at a general sales tax rate of 7%
• Amusements, movie tickets, etc will be subject to sales taxes

This is only a small representation of the changes. And this information should not be considered tax advice. Individual situations may vary. And as always, please consult your tax advisor regarding how the laws may affect you.

Tracy H. Allen, CFP®
Financial Advisor

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Meditation and Miniskirts

I never thought I would be able to find a connection between yoga, finance, and short skirts, but my patience has finally paid off. Since it’s a beautiful Friday in June, today’s blog will feature a couple of excerpts from the fun and funky side of financial news:

Down Markets, Down Dog
Some advisors are combining yoga with financial planning as a way to bring mindfulness to investing. It may seem counterintuitive to pair an ancient practice associated with quieting the mind with the pursuit of material gain, but proponents claim it helps them remain calm during a financial crisis and refrain from making emotional decisions. Some even teach breathing techniques to clients to help them get through difficult financial situations. As one advisor puts it, “Investing is very emotional. Yoga keeps it all balanced.”

Up Markets, Short Skirts
Quite possibly the nerdiest girl band ever, Machikado Keiki Japan sings about Abenomics, Prime Minister Shinzo Abe’s plan involving fiscal stimulus, monetary easing, and structural reforms. The best part is the hemline indicator – the girls’ skirts vary in length with the level of the Nikkei. For every 1,000 yen increase in the stock price average, the skirts will get shorter at their concerts. Apparently, fashion’s link to the economy is not new – miniskirts became popular in the ‘60s as the economy boomed, hemlines lengthened in tandem with the oil crisis of ’73, and shortened again in the go-go ‘80s. Fashion as an economic indicator – does this mean I can ditch my copy of The Economist for Vogue?

Sarah DerGarabedian, CFA
Director of Research

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Gross National Happiness

One of the most commonly used measures by which we gauge the health of our economy is GDP growth. GDP, or gross domestic product, is defined by Investopedia as, “the monetary value of all the finished goods and services produced within a country’s borders in a specific time period.” Economists look at GDP growth over time (quarter over quarter, year over year, etc.) to determine a country’s economic health and productivity. If you look at the definition, you can see that the implication is that more money = good. Nothing unusual there – most people tend to agree that more money = good, right? Take the recent winner of the $338 million Powerball jackpot. We all assume that whoever bought that ticket is about to be the happiest person on the planet. I can’t tell you how many times I catch myself daydreaming about what I would do if I won the lottery (note to my employers: I NEVER do this on work time, and it never involves me running out of my office without a backward glance). In talking with others about it we tend to agree that, while money can’t exactly buy happiness, a certain amount can provide the freedom to pursue what makes us happy, unfettered by the drudgery required to pay bills and feed our families. At least, that’s what we think.

I recently watched a documentary entitled, “Happy” which touches on the lives of various people around the globe, and seeks to discover what makes them happy. Surprisingly, some of the happiest people were also the poorest, financially speaking. A common theme among these self-described happy people was a supportive community of family and friends, as well as a sense of purpose in life. Researchers have found that money does affect happiness, up to a point – the point where basic needs are met. Beyond this, levels of happiness do not vary significantly between those making $50,000 a year and those making $5,000,000 a year (note to my employers: this does not get you off the hook for raises). Some of this is determined at a genetic level, almost as if we are all born with a “set point” for happiness, and no amount of good fortune or tragedy will cause a person to deviate from their set point for long.

Getting back to GDP – my favorite part of the documentary was about Bhutan, a country that has chosen to measure growth not by the monetary value of goods and services, but by the happiness of its citizens. Instead of a GDP index they have a GNH index, which stands for gross national happiness. According to the “short” (over 100 page) guide to the index I found online, “the GNH Index is meant to orient the people and the nation towards happiness, primarily by improving the conditions of not-yet-happy people. In the GNH Index, unlike certain concepts of happiness in current western literature, happiness is itself multidimensional – not measured only by subjective well-being, and not focused narrowly on happiness that begins and ends with oneself and is concerned for and with oneself. The pursuit of happiness is collective, though it can be experienced deeply personally. Different people can be happy in spite of their disparate circumstances and the options for diversity must be wide.”

One of my coworkers wrote a piece for our second quarter newsletter about the positive physical and emotional benefits we can reap by volunteering and giving back to our communities. The researchers interviewed for the documentary agreed that the happiest people tend to be the ones with strong ties to friends, family, and community, and who feel they have a sense of purpose in the world. As folks transition into retirement, I think it is especially important to remain active in the community and regularly get together with friends and family. Humans are social animals; we have evolved to thrive in groups and to enjoy helping others. That kind of happiness is free and available to everyone. But I’m still going to buy an occasional lottery ticket.

Sarah DerGarabedian, CFA
Director of Research

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Keep Calm and Carry On

While reading an article about the Nobel Prize award to two American economists, I spotted a headline to the right.  It featured a link to a story CNN wrote in honor of International Day of the Girl.  Titled “To my 15-Year Old Self:  Things I Wish I’d Known,” the writer posed that question to notable women in a variety of fields.  The link showed a picture of Oprah, because you always have to ask her those sorts of questions.

I find her rather annoying, so, naturally, I clicked the link.  The problem I have with her is she seems out of touch.  It is easy to talk about “living your truth” and “risking everything to pursue your passion” when you are a multi-billionaire for whom the risks brought great reward.  Do you think the person who just lost everything when his/her business collapsed feels happy and fulfilled because they “followed their dream?”  Doubtful.

Anyway, as I read the quotes from these highly successful ladies, it occurred to me that living in the past can be a dangerous thing.  Sure, it is good to look back and say, “Oh, I really wish I had not done that.”  On the other hand, you can become so paralyzed by fear of making the same mistake that you take no action at all.  The key is to learn from the mistake and get on with your life.

We can do that in our portfolios too.  There was a time when I was reluctant to invest excess cash in my portfolio because of current market conditions.  As a result, I missed out on some of the upticks in the market.  The lesson I learned is emotion has no place in investing. 

You may have similar feelings now with the upcoming election.  What happens if Obama is re-elected?  What would Romney do if he becomes President?  Will this country fall into a Great Depression or have a huge economic boom?  No one knows.  However, I would bet that, if you looked at previous elections, similar comments were said about the president and candidate then.  It happens with every election.  Work the crowd into a frenzy so they will watch the news.

We cannot change the past.  We cannot predict the future.  Let’s focus on what we can control (our behavior), keep calm, and carry on.

Cristy Freeman, AAMS
Senior Operations Associate

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