The financial crisis of 2008 and 2009 gave rise to Dodd Frank and other government legislation to prevent a similar occurrence initiated by a failure of a large financial institution(s). The overall theme was termed “too big to fail”. We think the efforts have fallen short. The financial system continues to have concentrations of risk. One example: 91% of all bank owned derivatives were held by just 4 banks at the end of 2015 according to the Comptroller of the Currency. The total value of Derivatives is very large. If one of the 4 banks encounters severe financial problems, we have little doubt, the U.S. Government will again be forced to step in to bail it out.
Daily Archives: April 12, 2016
The “Heat Map”
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 a C- (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.
The Numbers
Last week, Foreign Stocks and Bonds increased. And U.S. Stocks declined. During the last 12 months, BONDS outperformed STOCKS – A CHANGE.
|
Returns through 4-8-2016 |
1-week |
Y-T-D |
1-Year |
3-Years |
5-Years |
10-Years |
|
Bonds- BarCap Aggregate Index |
.4 |
3.4 |
2.0 |
2.4 |
3.9 |
5.0 |
|
US Stocks-Standard & Poor’s 500 |
-1.1 |
.8 |
.5 |
11.7 |
11.4 |
6.9 |
|
Foreign Stocks- MS EAFE Developed Countries |
.6 |
-4.5 |
-11.8 |
1.8 |
1.5 |
1.5 |
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, the station is holding a pledge drive and Your Financial Choices will not be broadcast.
Motivational Quote of the Week
“Do what you can, where you are, with what you have.” – Teddy Roosevelt
The Markets This Week
In a push-me-pull-you week of light trading, the major equity indexes finished down 1%. A strong rally early Friday pared losses for a time but fizzled. Although energy stocks rose, poorly performing bank stocks didn’t help matters.
There was some profit-taking after the previous week’s 2% rise, and stocks fell Thursday as the Japanese yen rose, despite the Bank of Japan’s efforts to push it lower with a negative interest-rate policy. That dented investor confidence in the ability of central banks to boost global growth, market observers say.
Rising oil prices helped bolster stocks, as they did after February’s lows. Oil rose 8% on the week to $39.72 per barrel, giving solace to those who believe the commodity is finally stabilizing. The energy-stock sector was the best performer last week, up more than 2%. Financials fell 3%.
The Dow Jones Industrial Average gave up 216 points, or 1.2%, on the week, to 17,576.96, and the Standard & Poor’s 500 index fell 25 to 2047.60. The Nasdaq dropped 1.3% to 4850.69.
Investors had plenty of conflicting data to absorb, says Kenneth Polcari, director of NYSE floor operations for O’Neil Securities. “The conversation turned around the yen trade,” and the fact that the currency’s rise is testing the Bank of Japan’s credibility, he says. It’s no surprise, then, that bond prices rose on the week. The market is in a trading range around 2050, says Polcari. “We haven’t broken out of it, but we haven’t broken down,” he adds.
Macroeconomic factors have influenced the market over the past few weeks, but when first-quarter earnings start flowing in this week, there will be more stock-specific activity, says David Lefkowitz, senior equity strategist at UBS Wealth Management Americas. Earnings are likely to be better than expected, although that will mean “less bad,” says Randy Frederick, managing director at Charles Schwab. “It’d be nice to see revenue growth,” he says.
It’s going to be the fourth quarter in a row of flat or down earnings, Lefkowitz says. Earnings could pick up in the second half of 2016, when head winds from the dollar’s rise and crude’s fall start to moderate in the quarterly comparisons. “We’ll remain in a trading range until there’s greater conviction that we’ll see a resumption of earnings growth,” he says. In addition to the start of profit reports this week, investors will see key U.S. economic data on inflation and retail sales beginning midweek.
(Source: Barrons Online)