Several years ago (in 2011) we were closely monitoring interest rates in Europe, especially Italian and Spanish government bonds. During 2011 their interest rates were soaring which indicated investors feared another Greece type of default
was possible. Many experts believed if Italy or Spain were to default, then France would probably default and the
future of the European Union would be jeopardized.
Things have changed in Europe. The moves by the European Central Bank sent yields on Spanish and Italian government bonds tumbling to record lows, with the former’s 10-year down to 2.642% on Friday, a massive drop from 7.75% in July 2012 when Draghi made his famous declaration to preserve the euro. Italy’s 10-year yield hit 2.743%, while Ireland’s 10-year ended at 2.464%, helped by a Standard & Poor’s upgrade to A-minus from BBB-plus. At the core of the euro zone, Germany’s 10-year yield slid to 1.35%, while France’s 10-year was down at 1.706%. In contrast, the U.S. 10-year ended the week at 2.592%, while the corresponding United Kingdom gilt was at 2.654%. Clearly, the euro zone’s bond yields reflect the likelihood that the ECB will maintain near-zero short-term interest rates for a long while and the likelihood of a default by Spain or Italy has decreased dramatically.
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 graded this factor 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’s economic data and additional monetary easing from the European Central Bank helped push the stock market higher. United States Non Farm Payrolls added 217k jobs in May while the unemployment rate remained unchanged at 6.3%. US Factory orders increased .70% in April over the prior month and the Manufacturing Purchasing Managers Index increased to 56.4 in May from 55.4 in April. Risk assets continued to see inflows following Mario Draghis, President of the European Central Bank, continued monetary stimulus measures by lowering their key refinancing rate from a historic low of .25% to a new low of .15%. Additional measures by the European Central Bank included cutting its deposit rate that it pays banks for parking funds overnight to -.1%.
Last week,U.S. Stocks and Foreign Stocks advanced. Bonds declined. During the last 12 months, STOCKS outperformed BONDS.
Returns through 6-6-2014
1-week
Y-T-D
1-Year
3-Years
5-Years
10-Years
Bonds- BarCap Aggregate Index
-.5
3.3
2.1
3.3
5.1
5.0
US Stocks-Standard & Poor’s 500
1.4
6.4
22.7
17.4
18.2
7.9
Foreign Stocks- MS EAFE Developed Countries
.8
3.0
18.2
5.1
8.3
4.2
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®. The Guest Host this week is Reyna Gobel, an author and Forbes contributor. Laurie and Reyna will discuss:“Helping higher education graduates to effectively manage debt while still living full lives.”
Laurie and Reyna 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.
Things are going the right direction: the stock and bond markets are trending up, my golf handicap is trending down, and my younger daughter Jennifer Ward and her husband Nick are moving back to the Lehigh Valley soon. All good things.
The bull was in full snorting mode last week, as stock prices jumped more than 1% company stocks led by a wide margin, but the bounty was shared with big companies, too, as the Dow Jones Industrial Average inched closer to 17,000. Trading was light, as it has been all year.
Most notably manufacturing and employment and some of the buying was driven by short covering, traders say.
There’s a sense of gathering momentum. For example, the percentage of stocks above their 10-day moving average is back to 85%, according to Wellington Schields. That’s a strong technical-strength signal about the bulls’ basic health, even
if the market usually stalls in the short term at such levels.
Similarly, there are indications economic velocity is improving, if the strong manufacturing and jobs data last week are any indication, says Peter Kenny,
chief executive of broker-dealer Clearpool Group. And though the low trading it’s less and less an arbiter of whether the market’s move is valid.”
In spite of the spring rotation out of biotech and momentum shares, where some stocks lost 20% to 40%, the broad market’s been resilient, says Marc Pado, CEO of Dow Bull Advisors. Those short have expected the emergence of the traditionally weak summer season for the market. However, the rotation back into those beaten-up stocks; the data; and Thursday’s easing by the European Central Bank, made shorts wonder, “Why be short?” and some threw in the towel, he says. Money doesn’t want to leave the market, even if it rotates out of one sector temporarily, he adds.
Last week, the Dow rose 207 points or 1.2% to 16,924.28, a new high. The Standard & Poor’s 500 picked up 26 to 1949.44, also a record. The Nasdaq Composite index rose 2%, or 79, to 4321.40. The Russell 2000 index soared 3% to 1165.21, and is back in positive territory for the year.
Friday, the Labor Department said that in May the U.S. added 217,000 jobs, in line with expectations. The unemployment rate was 6.3%, unchanged from April.
Investors don’t see macroeconomic and U.S. earnings growth factors as negatives and they won’t likely be that, says Michael Mullaney, chief investment officer at Fiduciary Trust. U.S. and global leading indicators are up, and it looks like “a mini-industrial revolution.” The single biggest factor in the rest
of 2014 is likely to be geopolitical risk, he adds.
The market’s valuation, however, can no longer be called fair. The bears argue stocks have already anticipated a stronger second half for the economy, given the S&P’s 2014 price/earnings ratio of 16 times, a bit higher than the long-term average of 15.
This week sees fewer U.S. data releases after the economic firepower of last week, so short of a major exogenous surprise we might be in for sideways action.
