It’s been a while since the last stock
market correction has occurred; the summer of 2011 to be exact. A
technical correction is defined as a price decline of at least 10% to a
security or market index following extensive price increases. Technical
market corrections are not necessarily bad as they help deter “bubble” like
valuations.
We regularly monitor economic
developments and still believe in the economic recovery and slow growth cycle.
We would advise not to be alarmed if a broad stock market correction were to
occur. Accordingly, we have placed great care in the construction of the asset
allocation to reduce the downside in portfolios if a correction were to
occur. The bond sleeve is designed to resist stock market volatility,
while the alternative strategies reduce your downside exposure by employing
various tools to hedge risks. Equities are selected based upon risk
factors that are lower as compared to their peers. It is our belief that,
through appropriate diversification, we can weather a correction while continuing
to achieve your long-term return goals.
Most
of the time the U.S. stock market looks to 3 factors (call them the “pillars”
that support the stock market) to support its upward trend – let’s grade each
of the pillars.
CONSUMER SPENDING: I have
upgraded this factor to B (above
average) based upon the increase in retail sales as reported in recent economic
reports.
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.
BUSINESS PROFITABILITY: I rate this factor B- (slightly above average).
Last week was a busy week for economic
data. US Building Permits and Housing Starts were up 8% and 13.2%
respectively month-over-month. Initial Jobless claims dropped to 297,000
in May from 345,000 in April. Inflation in the US rose to the acceptable
Federal Reserve level of 2% over the last year. Euro Area Gross Domestic
Product was recorded at .2% in the first quarter of 2014 prompting the European
Central Bank to signal they would continue to support the market place with
monetary stimulus.
Last week, Foreign Stocks and Bonds advanced but US Stocks were little changed. During the last 12 months, STOCKS outperformed BONDS.
Returns through 5-16-2014
1-week
Y-T-D
1-Year
3-Years
5-Years
10-Years
Bonds- BarCap Aggregate Index
0.4
3.5
1.0
3.6
4.9
5.0
US Stocks-Standard & Poor’s 500
0.0
2.4
16.2
14.7
18.8
7.7
Foreign Stocks- MS EAFE Developed Countries
.1
.9
9.1
4.1
9.2
4.6
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.
“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®, AEP®. This
week Laurie and her guest Tim Roof CFP of Valley National Financial Advisors will
discuss: “Investment
planning for every stage of your life.”
Laurie and Tim will
take your calls on this topic and other inquiries this week. 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 and Phillipsburg area; and, it is broadcast on FM 93.7 in
the Fogelsville and 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.
I made an “ace” on the 11th hole of
Saucon Valley Country Club’s Old Course on Saturday. An “ace” in golf is aka a Hole-in-1.
The 11th hole measures 146 yards and is
well guarded by sand bunkers. The pin was located close to the front of the
green so I chose to hit a 9 iron. I hit
the ball a little thin on more of a line drive than a perfect shot would
dictate. It was difficult to determine
whether my ball hit the green or landed in the sand bunker in front of the
green since my eyesight is not as sharp as it was in my younger years. One of my foursome said he thought saw the
ball hit and roll in, nevertheless, the excitement grew as we walked toward the
green. There was no ball in the sand
bunker and, sure enough, there it was at the bottom of the cup. Wow!
What a great feeling.
The odds of an average golfer hitting a hole in one: 12,000 to 1.
Saturday’s hole-in-1 was my second.
So, I feel blessed.
A stun grenade seemingly landed in the stock market last week, with blinding light, noise, and smoke that disoriented equity investors but caused no permanent damage. The broad market indexes managed to set new all-time highs early on, only to suffer a big 1% drop Thursday.
The volatile trading occurred as small-cap stocks flirted with correction territory, continuing a bearish trend that began in March. Meanwhile, the continuing and surprising rally in the bond market is making some investors nervous about the strength of an expected U.S. economic recovery. Such anxiety was confirmed by mixed economic data released last week, with April housing starts and jobs data strong but industrial production and capacity-utilization weak.
Amid these cross currents, the broad indexes finished pretty much unchanged. The Dow Jones Industrial Average ended the week at 16,491.31, down 0.6%, and below an all-time high of 16,715.44 set Tuesday. The Standard & Poor’s 500 ended at 1877.86, flat on the week, but down from an all-time high of 1897.45, also set Tuesday. The Nasdaq Composite bucked the trend and rose 0.5%, or 19, to 4090.59. The Russell 2000 small-cap index fell 0.4% to 1102.91, and briefly dropped 10% from its high on Thursday—technically, a correction.
Despite the index highs, “there’s an incredible amount of pessimism and negativity” in equity markets, says Michael Marrale, head of research, sales, and trading at broker-dealer ITG. He says hedge funds have sharply reduced their equity exposure since March, but he views the selling as a pause, as there is money on the sidelines and people are nervous. “You want to be a contrarian to the pervasive pessimism,” he says.
The mixed data scared stock investors, as “most thought the economy was accelerating,” says Brian Reynolds, chief market strategist at Rosenblatt Securities. He, too, is sanguine, and observes that corporate bond prices are near all-time high.
The bond-market rally was caused by short-covering, the weak industrial-production number, and growing expectations that the European Central Bank will cut rates in June, says Quincy Krosby, market strategist at Prudential Financial. Investors continue to struggle, she says, with how to value stocks in a world where the Federal Reserve is winding down its quantitative stimulus program this year.
