Two weeks ago, U.S. interest rates may have hit their low point for the next 20 or 30 years. A study of the history of Interest rates in the U.S. indicates rates rise for decades e.g., 1952 to 1981, then decline for decades. The 33 year long downtrend in rates could have ended in mid-October. Trying to figure out the future of interest rates, like the stock market, is difficult. Even the smartest money can forecast rates moving in the wrong direction. Having offered that caution, my reason for believing rates have bottomed is the FED’s talking points’ language has changed to indicate they are preparing the financial world for higher rates here in the U.S. Once the FED starts moving rates higher, they could continue to raise them for years to come.
NOTE: the term “interest rates” as used above refers to the interest rate paid on U.S. Treasury Bills, Notes and Bonds. Keep in mind that all interest rates here in the U.S. are connected to these rates even savings accounts and CD rates at the bank, corporate borrowing rates, and mortgage interest rates for new home buyers.
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 grade this factor to A- (very favorable)
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 have raised this factor grade to a B+ (above average). With over 360 companies in the S&P 500 having reported third-quarter results, profits are up 7.2% and revenue 3.9%, says Sheraz Mian, Zacks’ director of research. The improving tone of the reports has been a subtle, constructive factor, adds TD Ameritrade chief strategist J.J. Kinahan.
OTHER CONCERNS: The “Heat Map” is indicating the U.S. stock market is in good shape ASSUMING no international crisis. We have added the risk of an EBOLA pandemic to the “powder keg” in the Middle East to the situations to be watched. On a scale of 1 to 10 with 10 being the highest level of crisis, we rate these collectively as a 2, reduced from a rating of 3 in last week’s commentary. Risks continue to lurk, and they deserve our ongoing attention.
United States Gross Domestic Product “GDP” advanced an annualized 3.50 percent in the third quarter of 2014. Real personal consumption expenditures improved 1.8 percent, durable goods increased 7.2 percent and nondurables increased 1.1 percent. Real federal government consumption expenditures and gross investment rose 10 percent during the third quarter. Private inventories accounted for a subtraction of .57 percent from the third-quarter GDP.
The Federal Reserve made a decision to end its asset purchase program on October 29th. The Fed believes economic activity will continue to expand at a moderate pace, with labor market indicators and inflation moving toward acceptable mandate levels. Inflation in the near term will likely be held down by lower energy prices, however the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year. The Fed will maintain their existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities. This policy should maintain accommodative financial conditions. The Federal Reserve will remain data dependent as it assesses its interest rate policy moving forward. The Committee anticipates to maintain the 0 to ¼ percent target federal funds rate range for a considerable time following the end of its asset purchase program in October, especially if projected inflation continues to run below the Fed’s 2 percent long-term goal, and provided inflation expectations remain well anchored.
Last week, U.S. Stocks and Foreign Stocks increased and Bonds decreased. During the last 12 months, STOCKS outperformed BONDS.
Returns through 10-31-2014
1-week
Y-T-D
1-Year
3-Years
5-Years
10-Years
Bonds- BarCap Aggregate Index
-.2
5.1
4.1
2.7
4.2
4.6
US Stocks-Standard & Poor’s 500
2.7
10.9
17.3
19.8
16.7
8.2
Foreign Stocks- MS EAFE Developed Countries
2.2
-2.8
-.6
9.7
6.5
5.8
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 be attending an educational seminar and the show will be pre-recorded.
Join host, Laurie A. Siebert, CPA, CFP®, AEP® live when she returns on November 12 to discuss “Financial and environmental incentives of solar and geothermal energy with experts and users in the area.” 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.
It’s November. Already. Autumn is passing by too quickly. The windy weekend stripped most of the color from the trees, baseball season has ended, and the opportunities to play golf are few. The first snowfall could happen any day. Look forward, football season is entering the most exciting period and Thanksgiving is only several weeks away. As Gordon Ramsay said, “I don’t like looking back. I’m always constantly looking forward. I’m not the one to sort of sit and cry over spilled milk. I’m too busy looking for the next cow.”
Who’s afraid of October? Stocks finished the week and what is typically a poor market month at record highs after a wild ride that saw prices fall sharply at mid-month before surging higher. The major indexes delivered Halloween treats, as the Dow soared 3.5% last week in active trading.
The fireworks began Wednesday with a brighter view of the U.S. economy and jobs picture from the Federal Reserve, and accelerated Friday on a surprise announcement from the Bank of Japan that it would increase its asset purchases to boost its economy.
Additionally, markets welcomed news Thursday that the U.S. third quarter gross domestic product rose at a higher-than-expected 3.5% annual rate. That assuaged investor fears after the Fed also said Wednesday that, as long anticipated, it ended its monthly quantitative-easing program. Continued strong third-quarter earnings from Corporate America also bolstered investor enthusiasm.
Both the Dow Jones Industrial Average, up 585 points or 3.5% to 17,390.52 last week, and the Standard & Poor’s 500 index, which gained 54 to 2018.05, finished at all-time highs. The Dow rose 2% in October, the S&P 500 2.3%. The Nasdaq Composite index added 147 or 3.3% last week to 4630.72.
“The Fed’s upbeat view of the economy says the long-term U.S. expansion is on track and calmed any fears about the end of QE,” says one market strategist. The Bank of Japan’s surprise move will boost slow global growth, he adds.
That slow growth led to the earlier big drop, says Dan Greenhaus, BTIG’s chief global strategist. It’s been a powerful snapback, helped by good earnings, which are countering fears about plunging oil prices, weak global growth, and a strong dollar. Thomas Lee, co-founder of Fundstrat Global Advisors, says that institutional investors remain cautious despite the market recovery. That augurs well, he adds, for the near-term as markets head into November, the beginning of the historically auspicious November-to-April season for stocks.
Conspiracy theorists might wonder about the Fed’s timing in ending QE, which was followed within 48 hours by BOJ’s bond-buying. Consider the baton passed.
In case anyone forgot, there’s a national election in the U.S. Tuesday, but investors don’t seem to care much about it.
