Most of the time, the U.S. stock market looks to 3 factors to support its upward trend – let’s grade each of the factors: CONSUMER SPENDING: I grade this factor a C (neutral). THE FED AND ITS POLICIES: I grade this factor an A+ (extremely favorable) because the FED cannot do much more than it is doing to support the stock market and asset prices. BUSINESS PROFITABILITY: I upgraded this factor to an A (very favorable). About 70% of the 500 largest public companies beat the estimates for first quarter profits – this is a very positive development and supports higher stock prices in the future.
Monthly Archives: May 2013
The Economy
Two research notes released this week indicate the fiscal drag is hitting hard right now and is expected to fade towards the end of the year. Right now it looks like Q2 is tracking close to 2% GDP growth. Earlier this year, we expected fiscal policy to weigh on growth most heavily in Q2 and Q3, when sequestration, other federal spending reductions, and the recent tax increases looked likely to have their greatest combined effect. It now looks like the fiscal drag will be somewhat more spread out than we anticipated.
From economist Alec Phillips at Goldman Sachs:
My interpretation of these reports is the U.S. consumer will continue to be challenged by higher taxes and lukewarm job prospects. For this reason, I continue to hold my grade of C for the CONSUMER (see above).
Real Life Situations
QUESTION: You have been cautioning me about the risks of bond and bond mutual funds: if interest rates rise, the value of my bonds and bond mutual funds will drop. I could lose money on these investments. What else should I consider? ANSWER: Our interest rates are close to a historic low and bond prices at an historic high. The FED has heavily influenced interest rates to go to this low level. At some point, interest rates will rise which will challenge bond investors. New challenges require new thinking. We are going through the final steps of changing our asset allocation models to reduce bond exposure and increase exposure to real assets (including real estate), alternative strategies (including global macro, long/short and risk parity), as well as bond funds that use tactical management to attempt to reduce downside risk.
Heads Up!
Because of some quirks in our governmental accounting system, the Federal deficit will appear to be shrinking during the next several months. This is a short term illusion. Medicare continues to be an enormous future problem due to the baby boomers entering the Medicare system – participation will soar from 52 million to 66 million in 8 years- and due to the soaring cost per participant: from $11,500 to $15,151 per year. Total Medicare dollar outlay will increase 67% over 8 years.
The Numbers
Last week, U.S. Stocks and Foreign stocks increased. Bond decreased. During the last 12 months, STOCKS outperformed BONDS. Returns through 5-17-2013 1-week Y-T-D 1-Year 3-Years 5-Years 10-Years Bonds- BarCap Aggregate Index -.2 0.0 2.2 5.0 5.5 4.8 US Stocks-Standard & Poor’s 500 2.1 17.9 30.7 16.1 5.5 8.0 Foreign Stocks- MS EAFE Developed Countries .3 10.0 27.9 8.1 -4.3 5.9
LAST WEEK -Here is a look the cause of the volatility created this week by hedge funds, institutions, and those we call “traders”.
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 are facing the right direction,
all you have to do is keep on walking.” – Unknown
Tax Quote of the Week
I talked to the President about my taxes and he had two words of advice for me – PAY THEM!
– Bob Hope
“Your Financial Choices”
“Your Financial Choices” The show airs on WDIY Wednesday evenings, from 6-7 p.m. The show is hosted by Valley National’s Laurie Siebert CPA, CFP. This week, Laurie will discuss: “Benefits of financial planning and putting together your personal balance sheet, income statement, and cash flow”
Laurie will take your calls on this topic and other inquiries this week. This show will be broadcast at the regular time. WDIY is broadcast on FM 88.1 for reception in most of the Lehigh Valley; and, it is broadcast on FM 93.9 in the Easton/Phillipsburg area; and, it is broadcast on FM 93.7 in the Fogelsville/Macungie area – or listen to it online from anywhere on the internet. For more information, including how to listen to the show online, check the show’s website www.yourfinancialchoices.com and visit www.wdiy.org.
Personal Notes
My sympathy goes out to those affected by the tornadoes in Oklahoma and other parts of the Midwest. At times like this, I reflect on the relatively “secure” climate of Eastern Pennsylvania. Yes, we have to put up with the occasional heavy thunderstorm, flooding, ice or snow storm; but, overall it pales in comparison to some other U.S. sections which are hit with much more severe storms, drought, floods, hurricanes, earthquakes or wildfires.
The Markets This Week
Another week, another record high. The stock market continues to party like it was 1999, and last week equities soared 2% on mostly good economic news and a strong dose of reviving animal spirits. Not even chatter that the Federal Reserve might tap the brakes on its easy money policy this year was enough to spoil the festivities. Friday’s release of stronger-than-expected U.S. leading economic indicators and consumer-sentiment data helped bring the week to a strong finish. On the week, the Dow closed at 15,354.40, up 236 points, or 1.6%, while the S&P 500 rose 34 to end at 1667.47. Both indexes closed at all-time highs—again. The technology-heavy Nasdaq Composite index gained 62 points, or 1.8%, to 3498.97. The parade of new highs is a nice rush for investors, but when things start to look euphoric, it should awaken a bit of caution, at least for the short term, and the upcoming traditionally weak summer season. “At this point, the market looks like a giant momentum machine,” says Steve Sosnick, a senior trader at Timber Hill. Selloffs have been minor, even in reaction to negative Fed news. The market fell on Thursday after John Williams, head of the Federal Reserve’s San Francisco branch, said the central bank could end its bond-buying program later this year if the jobs market continues to improve. The Fed’s monthly purchases of some $85 billion in bonds has kept interest rates low and stock prices high. Investors should note, adds Sosnick, that some of the best-performing stocks have been those with the highest concentrations of short interest, like Tesla Motors (ticker: TSLA), the maker of upscale electric cars. The stock is up 140% since March, to $91.50 on Friday. Such moves, he adds, suggests the fear of being left out is now bigger than the fear of a market drop, and that investors are chasing performance. The bears are throwing in the towel, he says. Still, a little bit of caution doesn’t hurt. “It’s increasingly hard to come up with the next worry that could derail the market,” Sosnick says. “Ironically, that’s my worry.”( Source: Barrons Online).