The U.S. stock market has not dropped 10% or more since 2011, an unusually long time period. If the stock declines 10% or more sometime this year, I suspect it will not be the direct result of the U.S. economy. Instead, it will probably be the result of something occurring outside of the U.S. – for example, an escalation in the situation in Iraq which endangers the flow of oil, causing a spike in gasoline prices and a set back to the U.S. economic recovery.
For this reason, I will be closely monitoring the situation in Iraq. The situation in Iraq is like a giant pile of spaghetti. It is very difficult to see exactly where this is heading. Guessing or conjecturing about the outcome will lead to speculation. Instead, in future communications, I intend to report on whether the situation in Iraq is getting worse or better.
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: We 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: We 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: We rate this factor B- (slightly above average).
Last week’s economic data indicated several favorable trends: small business optimism improved, job openings increased dramatically (which indicates more companies are looking to fill positions), and real estate sales showed some strength.
On the negative side, crude oil prices rose to the highest levels since last September, retail sales remained sluggish, and consumer confidence came in below expectations.
Last week, U.S. Stocks and Foreign Stocks declined. Bonds were unchanged. During the last 12 months, STOCKS outperformed BONDS.
Returns through 6-13-2014
1-week
Y-T-D
1-Year
3-Years
5-Years
10-Years
Bonds- BarCap Aggregate Index
0.0
3.3
2.5
3.3
5.0
5.0
US Stocks-Standard & Poor’s 500
-.6
5.7
20.8
17.6
17.7
7.7
Foreign Stocks- MS EAFE Developed Countries
-.3
2.7
17.3
5.7
7.9
4.1
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 Attorney Kirby Upright of King, Spry, Herman, Freund & Faul, LLC. Laurie and Kirby will discuss: “Update on PA laws regarding same-sex marriage after the Whitewood decision” and estate planning issues.
Laurie and Kirby will take your calls on these topics 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.comand visit www.wdiy.org.
I contribute time, talent and treasure to many worthy causes here in the Lehigh Valley, two of which are: ArtsQuest and Historic Bethlehem Museums & Sites.
I was proud to see ArtsQuest prominently displayed in the SoccerFest: World Cup Viewing Party. National broadcast with international attention – two steps forward for the Valley and ArtsQuest.
Next up: Historic Bethlehem’s Blueberry Festival (THE SWEETEST FESTIVAL OF THE SUMMER). Save the date: July 18 – 20.
News of violence and political upheaval dominated headlines last week, causing stocks to tumble after a three-week winning streak.
Sunni militants inspired by al Qaeda captured two cities in Iraq, as the Iraqi government scrambled to defend Baghdad with help from Iran. The sudden strife caused oil prices to spike, with Nymex crude futures rising 4.1% to $106.91 per barrel, their highest level since September.
There was stateside news spooking some investors as well. Virginia primary voters chose a little-known college professor over Rep. Eric Cantor, the second-most powerful member of the House. The Tea Party victory signals that partisan gridlock is likely here to stay, and could spill over into a nasty debt-ceiling battle next year.
For the week, the Dow fell 148.54 points, or 0.9%, to 16,775.74. The Standard & Poor’s 500 fell 13.28 points to close at 1936.16, and the Nasdaq Composite dropped 10.75 points, or 0.2%, to close at 4310.65.
There was no frenzied selling—trading volume remains just above the lows for the year, and there’s little indication that it’ll be ramping higher.
“You’re in the beginning of the summer doldrums,” says John Canally, an investment strategist. The World Cup, which began last week, may have added another distraction. Multiple strategists we spoke to admitted they had one eye on the games during what technically should be considered working hours.
The traders who weren’t engaged in the Beautiful Game were mostly in a selling mood. “The instability in Iraq and the sudden change in the energy market were disruptive and they weren’t in anyone’s forecast,” says Tobias Levkovich, the chief U.S. equity strategist at Citigroup.
Thirty or 40 years ago, this kind of shock in the energy market would have moved stocks more, argues Canally. But our transition to a service economy from one based on manufacturing, plus increasing domestic oil production, soften the impact of changes in oil prices.
Other data points also proved bearish, with the University of Michigan consumer-sentiment gauge falling in June despite expectations it would rise, and May retail-sales growth disappointing the Street.
Strategists tend to see stocks moving up through the summer and the end of the year, although they don’t see spectacular gains. The S&P 500 is already up 4.75% for the year, and is within spitting distance of the end-of-year targets analysts had projected at the start of the year. But corporate earnings were surprisingly strong in the first quarter, growing about 5%, Levkovich notes. And investors still seem to think stocks are more attractive than just about any other asset class; equity-fund inflows rose sharply last week.
“The case for a summer melt-up remains stronger than that for a summer melt-down, as the high-liquidity, low-growth backdrop forces investor cash levels down,” writes Bank of America Merrill Lynch chief investment strategist Michael Hartnett.
