In search of a “bubble”: In the year 2000, Cisco Systems (CSCO) sold for 100 times earnings and paid no dividends. At the same time, the yield on the 10 year maturity U.S. Treasury Bond equaled 6.5%. When the internet bubble burst, Cisco’s price was decimated.
Today, the 10 year maturity U.S. Treasury Bond yields a low 2.4%. Meanwhile, Cisco sells for 16 times earnings and yields 3%. Many advisors believe it is clear a bubble in U.S. Treasury Bonds has formed, and it is only a matter of time before it bursts.
Note: the statistics on Cisco are for example purposes only. This is not intended to be a recommendation to buy Cisco.
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 CONTINUE to rate this factor B- (slightly above average). Earnings reports have continued to impress investors, with earnings per share running 10.2% above last year’s results, according to S&P Capital IQ. Nearly 59% of companies in the S&P 500 had beaten Wall Street earnings estimates and 60.7% had exceeded revenue estimates, according to Bespoke Investment Group.
The “Heat Map” is indicating the U.S. stock market is in good shape ASSUMING no international crisis. We have identified one potential international crisis hot spot:
Iraq and the “powder keg” in the Middle East including Gaza. On a scale of 1 to 10 with 10 being the highest level of crisis, I rate this Middle East powder keg situation as a 3 at this time. This is unchanged from last week, but still elevated, due to: (1)the inability to find a diplomatic solution to the Israeli/Gaza conflict, (2) the report of Iran shooting down an Israeli drone headed for Iran’s Natanz nuclear enrichment site, and (3) the report of Ukrainian troops fighting a convoy of entering Ukraine from Russia. Risks continue to lurk, and they deserve our ongoing attention.
Eyes were on the US Federal Reserve this week as officials said that tightening monetary policy may happen sooner than expected. With respect to monetary policy over the medium run, participants generally agreed that labor market conditions and inflation had moved closer to the Committee’s longer-run objectives in recent months, and most anticipated that progress toward those goals would continue. Moreover, many participants noted that if convergence toward the Committee’s objectives occurred more quickly than expected, it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated.
In regards to economic data for the week, inflation rose .10% in July and 2% year over year. Inflation has stayed within Fed targets and the Fed continues to believe inflation will remain tame for the foreseeable future. Mortgage applications went up 1.40% for the week ended August 16th, while the 30 year mortgage rate dropped to 4.29% from 4.35%. The hope is the reduction in mortgage rates can drive home buying and refinancing in the coming months.
Last week, U.S. Stocks and Foreign Stocks increased. Bonds declined. During the last 12 months, STOCKS outperformed BONDS.
Returns through 8-22-2014
1-week
Y-T-D
1-Year
3-Years
5-Years
10-Years
Bonds- BarCap Aggregate Index
-.2
4.4
6.2
2.7
4.6
4.7
US Stocks-Standard & Poor’s 500
1.7
9.0
22.5
23.6
16.6
8.5
Foreign Stocks- MS EAFE Developed Countries
.7
-.1
10.3
9.8
5.4
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®. This week, Laurie will discuss: “Educational Planning”
Laurie 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.comand visit www.wdiy.org.
I am very close to switching my allegiance of my favorite NFL football team, the Pittsburgh Steelers to the Philadelphia Eagles. It has nothing to do with the trouncing the Eagles gave the Steelers last Thursday. I am upset by the erosion of discipline on the Steeler team. In another display of his loose discipline routine, Pittsburgh coach Mike Tomlin decided to heavily play both running backs Le’Veon Bell and LeGarrette Blount in the Eagles/Steelers game following their arrest for possession of marijuana the day before the game. If I switch my allegiance, it will be my personal protest of the coach and will last as long as he stays – which might not be long if there is no penalty assessed against these two players and the Steelers fail to make the playoffs.
The stock market last week was like Arnold Schwarzenegger in Conan the Barbarian—quiet, strong, and hard to understand.
Both the Dow Jones Industrial Average and Standard & Poor’s 500 index registered their best gains of the summer, with the Dow rising more than 2%, even as trading volume closed the week at its lowest level of the year.
The market’s rise is somewhat odd given that traders spent most of the week waiting for Friday, when Federal Reserve Chair Janet Yellen gave a speech in Jackson Hole, Wyo. Markets were sluggish after her speech, which gave few hints about when the Fed might start raising interest rates.
“Her strategy is probably to deliberately underwhelm,” says Luke Bartholomew, an investment manager with Aberdeen Asset Management. “She’s saying the Fed might raise rates soon, but then again might not. That kind of vagueness suits her because it leaves options open.”
Earlier in the week, Fed minutes indicated that the debate is heating up among policy makers over the timing of a rate hike. The rising hawkish tone appears to have made a mark, as the yield on the two-year Treasury rose 0.08 percentage points to 0.492%, its largest gain since March. Although the market seems to think the Fed will start to hike in June 2015, “everyone seems to be leaving the door open to the possibility it will start in March,” says David Lafferty, the chief market strategist at Natixis Global Asset Management.
The Dow jumped 338 points, or 2%, last week, to 17,001.22, its third consecutive week of gains. The S&P 500 rose 33 points to 1988.40. The Nasdaq Composite index rose 74 points, or 1.6%, to 4538.55. Trading volume on both the NYSE and NASDAQ hit the lowest full-day level this year on Friday.
Traders remain fixated on violence and political tensions throughout the world, which included the beheading last week of an American journalist by an Islamic extremist group and continued strife in Ukraine. But the turmoil didn’t seem to affect trading as much as it has in the past.
“Early in the week, geopolitics seemed to fade and that allowed markets to focus more on the generally better earnings and fundamentals,” Lafferty says.
Better-than-expected housing data also buoyed stocks, as existing- home sales and housing starts rebounded strongly. Home Depot (ticker: HD) surprised investors with strong results for the spring quarter, sending the stock 8.8% higher on the week to lead the Dow. Just three Dow stocks ended the week in the red.
“The move in the market has been very broad-based, which is a good underlying sign of fundamental strength,” Lafferty says.
The big economic release of the week was US Gross Domestic Product rebounding to 4 percent growth in the second quarter, from a revised 2.1 percent contraction during the 1st quarter. The increase reflected positive contributions from personal consumption expenditures, private inventory investment, exports, nonresidential fixed investment, state and local government spending, and residential fixed investment. Initial Jobless Claims continued the run of good data as benefits came in at 302,000 in the week ending July 26th. Despite the decline in initial jobless claims, the US Unemployment Rate rose to 6.2 percent in July from 6.1 percent in June. This confirms more folks are coming back into the jobs market attempting to obtain employment, which have previously been long term unemployed or underemployed. Personal incomes rose .39 percent in June over the prior month thus extending consumer confidence. This is a slew of positive economic releases which is supporting a snap back in economic activity from the first quarter.
The data released over the prior week in relation to Federal Reserve policy supports low rates for an extended period of time. Inflation, tracked by the personal consumption expenditures price index, came in at 1.6 percent year over year and .2 percent month over month. When weighing subdued inflationary pressures with an improving jobs market, the Fed believes they can keep rates low until they confirm greater labor participation and inflation.
Last week, U.S. Stocks, Foreign Stocks and Bonds all increased. During the last 12 months, STOCKS outperformed BONDS.
Returns through 8-15-2014
1-week
Y-T-D
1-Year
3-Years
5-Years
10-Years
Bonds- BarCap Aggregate Index
.4
4.5
5.6
2.9
4.6
4.8
US Stocks-Standard & Poor’s 500
1.3
7.1
20.1
20.1
16.7
8.5
Foreign Stocks- MS EAFE Developed Countries
1.6
-.8
8.2
7.6
5.4
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.
