We ran across two apparently unrelated articles involving Russia. But, we suspect a connection exists.
In a potentially far reaching disclosure, a giant leak of “offshore” financial records, hacked from a Panama law firm, exposed a global array of crime and corruption. Millions of documents show heads of state, criminals, and celebrities using secret hideaways in tax havens. Among the 140 politicians and public officials from around the world mentioned in the documents is a dotted line connection to Russian President Vladimir Putin.
In another development, Russia just got yet another security service. Recently, Russian President Vladimir Putin ordered the creation of a Russian “national guard”. Officially, the new National Guard will combat terrorism and organized crime and will take over riot and SWAT duties from the Interior Ministry’s troops. But more than law enforcement or security concerns, the surprise announcement signals that the Putin administration is worried about instability.
Russia holds an important role in the world’s geopolitical web. For this reason we will monitor future developments closely.
Most of the time, the U.S. stock market looks to 3 factors (call them the “pillars” which support the stock market) to support its upward trend – let’s grade each of the pillars.
CONSUMER SPENDING: This grade is A- (very favorable).
THE FED AND ITS POLICIES: This factor is rated B (favorable). The U.S. economy can handle higher rates as long as the pace of future interest rate increases is slow. Fed Chair Janet Yellen made clear in her press conference after the December meeting that the path higher would be “gradual”.
The Fed’s plan to gradually raise rates in the coming years won’t derail the economy and brings some certainty to the market, says Morningstar’s Bob Johnson. The market consensus on the 2016 pace of increase is somewhere around two to possibly three rate increase of .25% each.
BUSINESS PROFITABILITY: This factor’s grade is downgrades to aC-(below average). As things stand, first-quarter S&P 500 profits—out in a few weeks’ time—are estimated to be down 7%. And, S&P 500 profits are forecasted to be a negative 2% in the second quarter ending 6/30/2016. Analyst estimates have plunged for the third quarter ending 9/30/2016; the Street now expects a rise of 5%, down from 14% six months ago.
OTHER CONCERNS: The “Heat Map” is indicating the U.S. stock market is in OK shape ASSUMING no international crisis. On a scale of 1 to 10 with 10 being the highest level of crisis, we rate these international risks collectively as a 5. While decreased, these risks still deserve our ongoing attention.
Last week, U.S. Stocks and Bonds increased and Foreign Stocks declined. During the last 12 months, STOCKS outperformed BONDS – A CHANGE.
Returns through 4-1-2016
1-week
Y-T-D
1-Year
3-Years
5-Years
10-Years
Bonds- BarCap Aggregate Index
.6
3.0
1.6
2.4
3.8
4.8
US Stocks-Standard & Poor’s 500
1.8
2.0
2.8
12.2
11.6
7.1
Foreign Stocks- MS EAFE Developed Countries
-.2
-5.1
-10.4
1.6
1.8
1.6
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.
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: “Extensions, late filing, penalties, and estimated tax payments”
Laurie will take your calls on these topics and other inquiries this week. Questions may be submitted early through www.yourfinancialchoices.com by clicking Contact Laurie. This show will be broadcast at the regular time. 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– 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.
Stocks rolled almost 2% higher last week, spurred by dovish comments on interest rates from Federal Reserve Chair Janet Yellen. Goldilocks economic data—not too hot to force an interest-rate hike soon, nor too cold to make investors fret about slowing U.S. growth—also gave equities a lift.
Yellen’s remarks on Tuesday that the Fed should proceed cautiously with respect to rate hikes put investors into a safe space, and stock prices jetted up from there. After a poor start to 2016, the major indexes are just a few percentage points below all-time highs.
As has been the case for months, comments from various Fed officials have bounced between dovish and hawkish, and have driven the market first one way and then another. Positive jobs data and a weaker dollar—down about 4% this year—also supported the rally.
The Dow Jones Industrial Average jumped 277 points, or 1.6%, to 17,792.75 last week, and rose 1.5% in the first quarter. The Standard & Poor’s 500 index rose 37 on the week to 2072.78, and 0.8% in the first quarter. The health-care sector fell 6% in the first quarter, the worst performer. The Nasdaq gained 3%, to 4914.54, last week.
While there has to be concern with the market’s overreliance on Fed chatter, one good sign last week was that shares rose even though oil prices fell, the first time that has happened in many weeks. Crude dropped 7% on the week, to $36.79 per barrel.
On Friday, the Labor Department reported higher-than-expected March nonfarm payrolls. The unemployment rate ticked up to 5% from 4.9%, but that was because more Americans entered the labor force, a positive indicator. Separately, U.S. manufacturing data suggested that the economy is expanding again.
The employment report was decent, but Yellen’s comments did a lot to reassure investors that the Fed intends to tighten monetary policy gradually, says Peter Jankovskis, co-chief investment officer at Oakbrook Investments.
Still, how long will the Fed be able to prop up the market? And, asks John De Clue, chief investment officer of the Private Client Reserve of U.S. Bank, will the Fed’s continued reinforcement of a “gradual” rate rise turn into a “one-trick pony”? At what point, he adds, does the market interpret Fed dovishness as symptomatic of an economy that isn’t getting sustainably stronger? If that happens, says De Clue, it will make investors worry about corporate profit growth.
In the long run, investors want to see interest-rate hikes that indicate the U.S. economic engine is revving strongly enough to withstand higher rates, De Clue says.
