During
the last 6 weeks, stock prices, the bond market prices, and commodities prices all
declined. This simultaneous decline is
rare. It has occurred on only 3
occasions in the last 40 years for this length of time.
Their
decline was tied to one concern – the suspicion the FED will soon end its period of easy monetary policy.
We think the reaction
is overdone. See the commentary below under
“The FED and Its Policies” for more details.
We believe the stock market will rebound because the 3 factors that
generally support it are strong (see the “The Heat Map” for these three
factors). Over the next 3 to 5 weeks, we
suspect interest rates will drop, bond prices will increase. However, in the long term, we suspect
interest rates will trend higher and bond prices lower.
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 continue to 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. Concerns about the FED changing
its stance spooked the stock market last week (and the bond market the last 4
weeks); but, we believe there is only a
slim chance the FED will change its accommodative policy anytime soon. We believe the FED will take steps in the
weeks ahead to further calm the markets.
BUSINESS PROFITABILITY: I graded this factor an A (very favorable).
Data released last week was mixed:
Housing and consumer confidence data released Tuesday was strong (good news),
but first quarter GDP released Wednesday was revised down to 1.8% from 2.4%
(bad news). The stock market ended higher on both days.
Last week, U.S. Stocks, Foreign
Stocks and Bonds increased. During the
last 12 months, STOCKS outperformed BONDS.
LAST WEEK -Here is a look the
cause of the volatility created this week by hedge funds, institutions, and
those we call “traders”.
Returns through 5-17-2013
1-week
Y-T-D
1-Year
3-Years
5-Years
10-Years
Bonds- BarCap Aggregate Index
.3
-2.4
-.7
3.5
5.2
4.5
US Stocks-Standard & Poor’s 500
.9
13.8
20.6
18.4
7.0
7.3
Foreign Stocks- MS EAFE Developed Countries
..8
2.2
15.1
6.7
-3.6
4.8
Source: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and c
annot be invested into directly. Three, five and ten year returns are annualized excluding dividends.
I took notice the Pittsburgh Pirates have “brought up” their #1 draft
pick: Gerrit Cole who struck out the first batter he faced with a 99 mph fast
ball and followed up with a 2 RBI base hit with his first at bat against San
Fran’s Cy Young award winning pitcher.
Gerrit went on to record a win in his first 4 starts. The Pirates have a deep pitching staff. And, they have the will and motivation to win
thereby snapping Pittsburgh’s more than 2 decade drought of winning seasons,
the longest in the history of professional sports. Even if you are a Phillies or Yankees or Sox
fan, a small part of you has to cheer for the Pirates to finally have a winning
season. If you end up cheering for the
Pirates, you will not be alone – the Pirates have sold out their last 3 home
games.
Quit gnashing your teeth every time a
member of the Fed board speaks. It’s time to sit back, relax and reminisce.
The Dow is up 13.78% this year, the
index’s best first-half showing since 1999. The quarter that ended on Friday
wasn’t a blockbuster like the one that preceded it, but the 2.27% gain was
solid.
Of course, memories don’t pay
dividends. The gnashing of teeth will begin again in earnest on Monday.
Few
strategists expect the market to repeat its first-half feats in the second half
of the year. There’s simply too much uncertainty about the actions of central
banks, and the Federal Reserve in particular. And yet, most strategists still
prefer U.S. stocks to almost any alternative — bonds are plunging, gold is
tarnished, emerging markets are no longer emerging.
Despite
the recent rise in volatility and dip in stock prices, the bull market in U.S.
equities is far from over, says Henry Smith, the chief investment officer at
Haverford Trust.
“I think this week is kind of a
reconfirmation that the bull is in full force,” he said. “What we saw
in the preceding three weeks was just a temporary dislocation due to a shift in
Fed policy.”
For the week, the Dow rose 110.2
points, or 0.74%, to end the week at 14,909.60. The Standard & Poor’s 500
was up 13.85 points to 1,606.28. The Nasdaq Composite rose 46 points, or 1.37%,
to 3,403.25.
On Friday, the Dow fell 114.89 points
as volume rose, but the trading spike was probably caused by index funds
trading stocks as some indexes were reshuffled, notes Ryan Larson, who leads
equity trading at RBC Global Asset Management.
Going forward, stocks could be held
back by the uncertainty over the timing of the Fed’s exit from its asset-buying
program. Larson thinks the recent drop in U.S. stocks has stabilized, but he
expects the S&P 500 to bounce around for the summer in a range from 1500 to
1650 as investors await word from the Fed ( Source:
Barrons Online).
