May 4, 2015

May 11th, 2015

When Was the Last Time You Had a Checkup?

Type “A” individuals, even though they are in good health, go to their primary care doctors every year for their annual physicals; some even see a physician on a semi-annual basis. Type “B” individuals only go to a doctor when they need to be treated for an illness. Which group do you think has better long-term health outcomes?

Have you had your regular periodic “Financial Review and Checkup”?

Please give me, or my admin. Joanne Kurtz, a call if you would like to schedule a review meeting or a conference call.

Outlook 2015

The first quarter of 2015 saw disappointing S&P 500 year-over-year earnings. The drag on earnings is attributed in part to the decline in oil prices and the stronger dollar. Earnings growth should resume in the second half of 2015, given a solid underlying economic environment, low interest rates and still slow wage growth. Moreover, economics suggest that, over time, the dollar should fall and oil prices should rise, which should provide a positive tailwind to earnings growth.

For fixed income, 10-year U.S. Treasury yields continue to hover around 2% as a result of several factors:

  • The Fed continues to keep short-term interest rates near-zero
  • The global demand for long-term high-quality bonds significantly exceeds the supply of newly issued securities bidding up the price of bonds and driving down the yield.

Although temporary factors have been holding down both corporate earnings and long-term interest rates, these factors should fade as we move into 2nd half of 2015 and into 2016.

US Savings Bonds (previously reported in my 12/23/14 Market Commentary)

  1. Have Your US Savings Bonds Matured?
  • EE bonds with issue dates after November 1984 are no longer earning interest.
  1. What is the Current Interest Rate for EE Bonds?
  • The annual interest rate that applies to EE Bonds with issue dates from May 1997 through April 2005 is 49%.
  • EE Bonds issued from May 1997 through April 2005 earn a variable rate of interest. Treasury determines the rate each May 1 and November 1 and applies that rate for six-month rate periods that start in the next six months.
  • The initial annual interest rate that applies to EE Bonds with issue date of November 1, 2014 is also 49%

Cash those bonds earlier and put the proceeds to work earning a higher return.

The Markets Last Week

The stock market lost its mo’ last week. The major indexes fell as previously strong social-media stocks plunged and surprised investors, who hammered the rest of the market. A rally Friday took the edge off a retreat that had reached 2% at one point. Nasdaq and small-cap stocks fell 2% to 3%.

Investors also didn’t like a much worse-than-expected report out Wednesday on first-quarter U.S. gross domestic product. GDP was up 0.2% in the period, compared to a consensus projection of 1%. But the heavy damage to stocks was caused by quarterly profit reports from Twitter (ticker: TWTR) and LinkedIn (LNKD). Twitter, down 11%, missed sales expectations, while LinkedIn, off 20%, lowered guidance for the rest of 2015.

With the market hitting all-time highs the previous week on strong earnings from “old tech” stocks such as Microsoft (MSFT), investors weren’t primed for disappointment.

The Dow Jones Industrial Average lost 56 points, or 0.3%, on the week, to 18,024.26, and the Standard & Poor’s 500 index gave back 9 to 2108.29. The Nasdaq fell 1.7%, or 87, to 5005.39 while the small-cap Russell 2000 index fell 3.1% to 1228.10.

The social-media companies’ struggle to monetize traffic starkly contrasted with the previous week’s set of good earnings from traditional tech concerns, says Peter Kenny, chief market strategist at Clearpool Group. Disappointment in U.S. growth also played a part. People can blame the strong dollar or a weak energy sector, “but the first-quarter GDP was far worse than expected,” he says.

When the Federal Reserve blamed the quarter’s softness on “transitory factors,” investor hopes evaporated that the central bank might delay a rate hike, says Joe Saluzzi, co-head of trading for Themis Trading.

According to Zacks, profits are up 4.7% for the 361 companies in the S&P 500 that have reported first-quarter results so far, but revenue is down 4.1%. Saluzzi expects a continuation of the range trading seen since last November, with the S&P 500 stuck inside 2050 to 2125. “You need something to pull it out, and it won’t be earnings,” he says, because investors know some earnings-per-share growth comes from heavy corporate share buybacks.

It remains to be seen what the crumbling of high-valuation stocks means for the rest of the market. “When you see frothy names weak, it tends to spill over [in the broad market],” says Michael Yoshikami, CEO of Destination Wealth Management, who is also looking for a continuation of choppy and range-bound trading in the near-term.

Monday will see McDonald’s (MCD) announcement of a turnaround plan. Leaks have been few on the proposal. Hedgeye analyst Howard Penney says speculation about the creation of a real-estate investment trust structure or a levering up could miss the mark. Instead, the world’s biggest restaurant chain might sell off some company-owned outlets overseas and shrink the menu. Mickey D’s needs to get “hotter, fresher, and faster.” (Source: Barron’s Online).

The Numbers

Returns through 5-1-2015 1-week Y-T-D 1-Year 3-Years 5-Years 10-Years
Bonds- BarCap  Aggregate Index      -.9      .9   3.9     2.5     4.1     4.7
US Stocks-Standard & Poor’s 500     -.4    3.0 14.2   16.9   14.6     8.4
Foreign Stocks- MS EAFE Developed Countries     -.9    8.9   1.0   11.2    7.3     5.6

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

“It doesn’t matter where you’ve been, only where you are going.”
L.M. Fields

 


 

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