Government-bond yields are heading higher around the world, a move typically linked to rising expectations of economic growth and inflation. When interest yields rise, bond prices decline. Some market forecasters worry the recent run-up of yields is just the latest in a series of false starts. In three of the last four years, bond yields jumped sharply only to drop later as economic and geopolitical concerns took over investor minds.
There is a strong felling of déjà vu in markets right now. But, every pattern has an end and the U.S. economy, in 2016, may provide the springboard for real economic growth and higher yields stretching far into the future.
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.
BUSINESS PROFITABILITY: This factor’s grade is aC-(below average). So far, first quarter corporate-earnings reports weren’t as bad as anticipated but certainly nothing to write home about.
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 4. While decreased, these risks still deserve our ongoing attention.
Last week, U.S. Stocks and Foreign Stocks increased. Bonds declined. During the last 12 months, BONDS outperformed STOCKS.
Returns through 4-22-2016
1-week
Y-T-D
1-Year
3-Years
5-Years
10-Years
Bonds- BarCap Aggregate Index
-.4
3.0
1.9
2.2
3.6
4.9
US Stocks-Standard & Poor’s 500
.5
3.0
1.4
12.6
11.7
7.0
Foreign Stocks- MS EAFE Developed Countries
1.3
.2
-8.4
3.3
2.3
1.7
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 is on vacation, and will not be in the studio. Questions submitted via the website at yourfinancialchoices.com will be addressed during next week’s live show – Wednesday, May 4.
The U.S. stock market finished higher last week, coming within a whisker of all-time highs but failing to push through. Trading was active and U.S. economic data was mixed.
Worse-than-expected earnings from tech stocks like Microsoft (ticker: MSFT) and Alphabet (GOOGL), parent of Google, pushed down the tech sector, which fell 2% Friday.
The Dow Jones Industrial Average gained 106 points or 0.6%, to 18,003.75. The Standard & Poor’s 500 index advanced 11 to 2091.58. The S&P 500 hit 2111 intraday Wednesday, less than 1% below the 2131 record of last May. Tech-stock weakness hit the Nasdaq, which fell 0.7% to 4906.23. The Russell 2000 jumped 1.4% to 1146.69.
Last week’s volatility and failure to punch through the old high reflects an “internal debate on the Street on whether the market is overvalued or fairly valued,” says Malcolm Polley, president of Stewart Capital Advisors. Undervalued it’s not, he adds.
With a market price/earnings ratio of 17 times, “you can make the case that if profit margins hold up, profits grow, and rates don’t go up, the market is adequately valued,” he adds. Only higher earnings and stable rates will get it higher, he adds, but rates are going up, and the market’s seasonally weak summer season is coming up.
We agree with Polley’s view, but it must be noted that market breadth—the number of stocks advancing versus those declining—and other underlying factors are as bullish as they’ve been since a year ago.
Also, as James Paulsen, chief investment strategist for Wells Fargo Capital Management, points out, defensive stocks have been giving way. The focus has been on new highs, but the leadership change is important as an indicator that the market could soon make another try for a new high.
Last week utilities, staples, and telecom stocks fell. Those were the best performers in the first quarter but are so far the worst in the second. Other bullish signs include the trend of small caps, cyclicals, and multinationals beating, respectively, large caps, defensive, and domestic stocks.
Part of the market-valuation debate is influenced by the earnings reports. On that front, “there isn’t much clarity,” yet, says J.J. Kinahan, chief strategist for TD Ameritrade. For the multinationals it was a mixed picture, he adds, with McDonald’s (MCD), Caterpillar (CAT), and IBM (IBM) showing weakness overseas. It suggests consumers outside the U.S. are doing less well than reports indicate, he adds.
On Wednesday the Federal Reserve Open Market Committee meeting ends, but no rate changes are expected. The U.S. first quarter GDP number will be released Thursday. That also marks the day when the bull market that began in March 2009 will become the second-longest in history, at 2607 days, topped only by the technology bull of October 1990 to March 2000.
