May 18, 2015

May 19th, 2015

Global Economies and Markets

Most readers know that the Fed is probably going to start raising interest rates later this year for the time since 2007. In contrast other global central banks, including the European Central Bank, or the Bank of Japan, and even the Bank of China, are in an easing mode (cutting interest rates).  So you have the Fed moving in one direction, pulling the punchbowl away, while the other global central bankers are adding to their punchbowls.

These apposing actions are causing some interesting behaviors in terms of the markets shifting some demand away from the US stock market toward foreign markets. It is also contributing to a strengthening of the US dollar relative to many other currencies adversely impacting US exports. Investors whose portfolios are globally diversified have no need for concern.

It appears that we’ve hit an inflection point in several large foreign economies — where things have stopped getting worse and have started to improve —- benefiting to some degree from what central banks are doing.

Volatility in the Market this Year

The changes above have contributed to market volatility year-to-date. The day-to-day swings from the day high to the day lows and from day-to-day, were twice as high in January than in 2014 and about 50% higher day-to-day swings over the last few months compared to 2014.

There’s been significant resistance for the S&P 500 to break through the 2,100 to 2,120 range. However, today the S&P 500 hit a new inter-day high of 2130.

The Markets Last Week

Undeterred by another round of soft economic data released last week, investors sent the Standard & Poor’s 500 index to an all-time high. This year’s new highs, however, have been modestly above previous records, unlike last year’s sharp moves. Chalk that up to perverse circumstance. In normal times, investors want a growing economy and rising corporate earnings. Today, however, that otherwise rosy scenario almost certainly would mean higher interest rates. Good news would be bad news.

Rates eventually will rise, but the market consensus is that the Federal Open Market Committee, the Fed’s policy-making arm, won’t raise interest rates at its next meeting, scheduled for June 16-17. That helps explain why the market has been scratching its way higher. A September hike remains an open question. While jobless claims last week were decent, the latest figures on U.S. retail sales, consumer sentiment, and industrial production were all weaker than expected.

“There’s nothing out there that’s changing the market narrative,” says Michael Matousek, head trader at U.S. Global Investors. The market range has gotten even tighter in recent weeks, like a spring coiling. “If you get a little trading volume, it could be the start of the next leg higher,” he says.

The Dow Jones Industrial Average gained 82 points, or 0.5%, on the week, to 18,272.56, and the Standard & Poor’s 500 index rose 7 to 2122.73. The Nasdaq added 45, or 0.9%, to 5048.29.

LAST WEEK’S ACTION says “the Fed hike is off the table for June, and perhaps even for September,” says Adam Sarhan, CEO of Sarhan Capital. “The Fed has said its action is data- dependent, and the data [are] weak.”Sarhan says that a catalyst to propel the market out of its range trading could be the growing conviction that a September rate hike won’t happen.

Following a weak first quarter, the economy hasn’t shown much verve, notes Anwiti Bahuguna, a senior portfolio manager at Columbia Threadneedle Investments. There’s no reason for the Fed to tighten, she says.Expectations for earnings growth haven’t improved in the current quarter, and consumers haven’t stepped up their spending, so that doesn’t bode well for second-quarter growth, Bahuguna says, adding, “It might be a rocky period.”

Significant sales gains, and thus profit growth, probably won’t be seen until the fourth quarter. Meanwhile, summer is a traditionally weak season for stocks, with lower trading activity. What’s to get excited about? For the time being, it’s low rates (Source: Barron’s Online).

The Numbers

Returns through 5-15-2015 1-week Y-T-D 1-Year 3-Years 5-Years 10-Years
Bonds- BarCap  Aggregate Index      .1      .9   3.2     2.3     3.9     4.7
US Stocks-Standard & Poor’s 500      .4    3.9 15.8   19.4   15.8     8.5
Foreign Stocks- MS EAFE Developed Countries    1.4   11.3   3.2   14.7    9.7     5.9

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

“Leadership is all about caring, daring and sharing!

       Caring for people, Daring to Act fearlessly,

          & Sharing the success with all!”            

               – Sujit Lalwani, Life Simplified!



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