As you may recall, we have been advising you to refinance your debt now. We would like to take this opportunity to give the United States Government some advice regarding its debt:
Cool it, US Government! You are spending way beyond your means. The national debt has more than doubled in 8 short years from $9.5 Trillion to $19.3 Trillion. And, we do not hear either candidate suggesting the U.S. Government must cut spending to control the deficit.
The yield on the U.S. Treasury Note with a 10 year maturity HAS NEVER BEEN LOWER. The yield was 1.36% on 7/8/2016, the lowest rate in its 225 year history.
Go Long! Every student of Finance knows borrowers, in this case the U.S. Government, should borrow using the longest maturity when interest rates are low. But, only 13% of U.S. Government debt has a maturity of over 10 years.
Go even Longer! The longest maturity U.S. Government bond issued is currently 30 years in length. But, why 30 years? Why not 50 years? Other developed nations have issued 50-year bonds. Why not United States?
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). Favorable activity in the housing market continues to support growth in the level of spending.
THE FED AND ITS POLICIES: This factor is rated A (very favorable) which is an increase from the previous week. Economic reports indicate the U.S. economy is improving. Because of BREXIT, international turmoil, and the strong dollar, the Fed will not raise rates for the remainder of 2016 (more likely than not).
BUSINESS PROFITABILITY: This factor’s grade is aC-(below average). During the upcoming month, corporations will release their second quarter corporate-earnings reports. We will monitor this closely for possible upgrade.
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. These risks deserve our ongoing attention.
Last week, U.S. Stocks and Foreign Stocks increased. Bonds declined. During the last 12 months, BONDS outperformed STOCKS- a change from last week.
Returns through 7-15-2016
1-week
Y-T-D
1-Year
3-Years
5-Years
10-Years
Bonds- BarCap Aggregate Index
-.8
5.3
6.0
4.1
3.6
5.1
US Stocks-Standard & Poor’s 500
1.5
7.0
4.9
11.0
12.8
8.0
Foreign Stocks- MS EAFE Developed Countries
3.7
-1.9
-9.6
1.4
2.8
2.3
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:
“IRA’s and Roth IRA’s – The Power Behind Them”
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.
According to a neighbor of ours in upstate New York, bear meat is tasty. Last week, bullish investors found out just how tasty. After being caged in a tight range for nearly 14 months and after several fruitless attempts to top its all-time high set in May 2015, the bull charged to a new high in convincing fashion. The two major stock indexes set records every day but one and rose about 2%.
The rally’s proximate causes were short covering by mauled bears; good-to-decent economic news out of the U.S. and China; and indications from central banks that the global ultralow interest rate regime will continue. The turn-on-a-dime, rollicking 8% rally since Brexit lows on June 27 made it feel as if somewhere a power switch had been flipped on.
The Dow Jones Industrial Average gained 370 points, or 2%, to 18,516.55, a new high. The Standard & Poor’s 500 index soared 32 points to finish at 2161.74 on Friday, just off Thursday’s all-time peak of 2163.75. The Nasdaq Composite rose 1.5%, to 5029.59.
Trading volume and many other market technical measures, like breadth, are strong. “That tells you this breathtaking run is a good breakout,” says Keith Bliss, director of sales at broker-dealer Cuttone. He adds that another confirming measure is the 11% post-Brexit rise in the small-cap Russell 2000 index, which has outperformed large-cap measures.
Yet that’s cause for concern to Ralph Fogel, head of investments at Fogel Neale. The Russell 2000, the Nasdaq, and the Dow transports are not near their highs, which he thinks is a lack of confirmation and “disconcerting.”
Fogel notes that if you “take a few hundred stocks out of the equation, the broad market hasn’t surpassed the highs.” The market’s price/earnings ratio isn’t cheap, at 18 times, and corporate earnings-per-share growth is deteriorating, adds Fogel, who nevertheless remains “fully invested.”
Tradition Capital Management Chief Investment Officer Benjamin Halliburton concurs. “It’s hard to see significant upside from here,” he says. And yet, he adds, for most investors the choices are limited, given the extraordinarily low yields that government and corporate bonds offer. The 10-year Treasury yields about 1.6%.
“If the economy continues to show some backbone, it should be OK,” says Tom Carter, trader at JonesTrading Institutional, who calls himself “somewhat bullish.” Second- quarter earnings are going to be down from a year ago, but perhaps the results will be better than the lowered expectations, he says.
Many professional market participants still don’t seem to believe in this aging bull, which could be a positive signal. Moreover, individual investors have yet to join the festivities. Lately, the heavy lifting has been done to a large extent by corporations buying back their own stock in huge bunches.
In recent months, we’ve been more skeptical than downright bearish about the prospects for this seven-year bull market’s sustainability. We have to admit our view now seems off the mark. We’re nonplussed by a market at all-time highs that betrays few signs of irrational exuberance.
