June 10, 2015

June 10th, 2015

Market Perspective – Key Points

  • The S&P 500 is stuck in a trading range currently midway between the 12/31/14 close of 2058.9 and the all-time highs 2130.8 close on 5/21/15. Despite many gyrations in the US stock market, little progress has been made to year-to-date.
  • Conversely, foreign stock performance has been outpacing domestic stock performance —- reinforcing the benefits of having a diversified investment portfolio.
  • A rebound from the weak start for the US economy this year has yet to surface, but the pace is expected to pick up in the second half.
  • Interest Rates – The consensus expectation is that the Fed will not begin raising rates until at least September with subsequent increases at a slow pace. Bond rates have been trending up over the past 3 months, adversely impacting bond prices.
    • The interest rates on German sovereign bonds and US Treasury bonds are highly correlated, so when one moves, the other is likely to move as well, as investors reposition their assets. Consequently the recent spike in German yields had a ripple effect across the globe. Greater globalization means money can move internationally relatively easily.  Investors need to expect volatility in bond prices and remain appropriately diversified with their bond holdings.
  • US Consumers – Americans have paid down and/or refinanced their mortgage debt to an incredible degree.  Mortgage payments as a percentage of disposable income has dropped to the lowest level in 34 years, according to Federal Reserve statistics.  Lower mortgage payments mean consumers have more spendable income – a big plus for future economic growth in the US.

The Markets Last Week

The U.S. economy is back, chugging ahead with strong job gains and rising wages. People who had given up on ever finding a job decided to try their luck again. Dealers can barely keep the cars from flying off the lots. Factory machines are humming.

Good news, right?

Well, stock investors aren’t quite that predictable. The major U.S. stock indexes traded slightly lower for the week despite positive economic data—or perhaps because of it. Investors had been enjoying the so-so economic growth that persisted through much of this recovery. A week of unequivocally good news, on the other hand, increases the likelihood of higher interest rates in the future. “Investors think that the ideal scenario is for growth to be just sluggish enough for the Fed to stay on hold forever,” says Jim O’Sullivan, chief U.S. economist at High Frequency Economics.

Also weighing on investors’ minds are the uncertain prospects for keeping Greece in the euro zone. Last week the country delayed some payments to creditors, and Greek leaders scrambled to come to a deal before they run out of money.

The Dow Jones Industrial Average dropped 161 points, or 0.9%, on the week, to 17,849.46, its third consecutive weekly decline. The Standard & Poor’s 500 index fell 15 points to 2092.83. The Nasdaq Composite was essentially flat, ending at 5068.46. The yield on 10-year Treasury notes jumped 0.305 percentage point on the week, to 2.402%, the largest gain since June 2013, in anticipation of rising interest rates.

Recent economic data are simply too strong for investors, or the Fed, to ignore. The U.S. economy added some 280,000 jobs in May, and average hourly wages rose 0.3%, above expectations for 0.2% growth. Cars sold at an annualized rate of 17.8 million in May, also well ahead of expectations, and the ISM manufacturing index likewise showed surprising strength. (Source: Barron’s Online).

The Numbers

Returns through 6-5-2015 1-week Y-T-D 1-Year 3-Years 5-Years 10-Years
Bonds- BarCap  Aggregate Index -1.4     -.4   2.1     1.8     3.5     4.4
US Stocks-Standard & Poor’s 500    -.6     2.6 19.1   20.2   16.9     8.0
Foreign Stocks- MS EAFE Developed Countries -1.7     6.7 -2.5   15.5    9.8     5.3

Source: Morningstar Workstation. Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  Three, five and ten year returns are annualized excluding dividends.

Motivational Quote of the Week

“If you think you are too small to be effective, you have never been in the dark with a mosquito!”

― Wolfgang Reiber


 

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