Interest rates in the bond market are rising. For example, one of the most important bonds, the 10 Year maturity U.S. Government Bond, has seen its interest rate rise from 2.4% at the beginning of January to 2.66% on Friday. This is a big increase in the world of bonds. If Interest rates continue to rise at this pace, investors will see losses in long-term maturity and intermediate-term maturity bonds as well as similar bond mutual funds. Our models have already severely reduced the amount of long-term and intermediate-term bonds. And, rapidly rising interest rates will make the stock market susceptible to a correction. We will monitor interest rates closely.
Daily Archives: January 22, 2018
Did You Know…?
The annual limit for gifts (to family members or other individuals) in 2018 has been raised to $15,000. Such gifts are free of income taxes for both the person giving the gift as well as the person receiving the gift.
Tax Tips you can use
Speaking of gifts, one the best gifts to consider is a gift to your child to jump start your child’s Roth IRA. The maximum Roth IRA contribution equals $5,500 per year. A gift of $11,000 would fund both 2017 and 2018 Roth contributions. Assuming your child is age 25, this $11,000 could grow to equal $165,700 at age 65, if it averages 7% per year. The entire $165,700 can be withdrawn at that time TAX-FREE.
Disclosure: 7% rate of return is used for illustrative purposes only. There is no assurance this rate of return will be achieved. Investments are not FDIC insured and may lose money.
Update – Washington
The U.S. stock market has jumped since the November 8th election. We identified 4 initiatives on which the U.S. stock market is speculating to be successfully accomplished early in the Trump administration. What will happen next? It is still to be determined!
The 4 initiatives will have a tremendous influence on the “Heat Map” which forms the basis of our forward looking view of the U.S. economy. We consider the success or failure of the 4 initiatives to be “leading” indicators for the Heat Map.
Below are the 4 Trump administration initiatives upon which the stock market is speculating and what progress, if any, has been made:
- Tax cuts and tax reforms benefiting most individuals and businesses. THE MOST SIGNIFICANT TAX LEGISLATION IN A GENERATION WAS SIGNED INTO LAW LAST YEAR. CUMULATIVE PROGRESS TOWARD GOAL: 100%
- Infrastructure spending of up to $1 Trillion over the upcoming 7 to 10 years. PROGRESS MADE ON TAX REFORM POINTS TOWARD PROGRESS IN THIS AREA, TOO. CUMULATIVE PROGRESS TOWARD GOAL: 35%
- Affordable Care Act amendment, reform or reorganization. THE TAX REFORM LAW REMOVED THE REQUIREMENT EACH INDIVIDUAL OBTAIN HEALTHCARE COVERAGE. PROGRESS TOWARD THIS GOAL IS 35%.
- Roll back of government regulations and Executive Orders considered to be difficult for businesses. ROLL BACKS HAVE CONTINUED. CUMULATIVE PROGRESS TOWARD GOAL: 55%
As the action happens in Washington on these 4 initiatives, don’t be surprised if the political “tug and pull” contest results in a wilder than normal stock and bond market.
We will continue to report in future issues on the progress on each initiative.
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 an A- (favorable). Employees will see larger paychecks soon because of new, lower tax rates. Larger paychecks puts more money in consumers’ pockets; hence, more spending to help stimulate the economy.
THE FED AND ITS POLICIES: This factor is rated C- (Below average).
BUSINESS PROFITABILITY: This factor’s grade is A- (very favorable). Corporations are in the midst of releasing 4th quarter earnings. During the next two weeks, we will develop a sense of not only the 4th quarter earnings but also how executives see the remainder of 2018.
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. These risks deserve our ongoing attention.
The Numbers
Last week, U.S. Stocks and Foreign Stocks increased. Bonds declined. During the last 12 months, STOCKS outperformed BONDS.
|
Returns through 1-19-2018 |
1-week |
Y-T-D |
1-Year |
3-Years |
5-Years |
10-Years |
|
Bonds- BarCap Aggregate Index |
-.4 |
-.9 |
2.6 |
1.5 |
2.0 |
3.7 |
|
US Stocks-Standard & Poor’s 500 |
.9 |
5.2 |
26.6 |
14.0 |
16.0 |
10.2 |
|
Foreign Stocks- MS EAFE Developed Countries |
1.2 |
5.0 |
29.1 |
9.9 |
8.2 |
3.4 |
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 welcomes Tim Roof, CFP®, Vice President and Connor Darrell, Senior Associate, Head of Investments, of Valley National Financial Advisors, will discuss:
“2017 Market review and outlook for 2018”
The trio will take your calls on this or other topics. 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.
Motivational Quote of the Week
“Difficult roads often lead to beautiful destinations. The best is yet to come.” – Zig Ziglar
The Markets This Week
Like a magician who uses misdirection to distract the audience from what really matters, the possibility of a government shutdown—still to be determined as of press time—took investors’ attention away from the slow rise in Treasury yields.
That’s too bad, because the latter might ultimately matter more for the stock market than the former.
Not that you’d know anything serious happened last week simply by looking at the benchmark returns. The Dow Jones Industrial Average gained 268.53 points, or 1.04%, to 26,071.72—just another all-time high—while the Standard & Poor’s 500 index rose 0.9%, to a record 2810.30. And the Nasdaq Composite climbed 1%, to 7336.38, also an all-time high. The S&P 500 has now closed at a record level 10 times this month, just one short of the record of 11 set in January 1964—with eight trading days to go.
Do you know what else rose to a new high, though not a record one? The 10-year Treasury yield, which closed at 2.639% Friday, its highest since July 2014. The stock market didn’t mind—obviously—and there are many who believe that yields can just keep heading higher without dinging equities, as long as increases are driven by growth and inflation. Others contend that it’s the speed of the move that will determine whether stocks rise or fall, if the 10-year yield does indeed break higher. “The market doesn’t like quick moves,” says Quincy Krosby, chief market strategist at Prudential Financial. “That gives it the jitters.”
Not everyone is so sure. Jim Paulsen, Leuthold Group’s chief investment strategist, notes that bond yields have been trending lower for the past 38 years, and have remained within one standard deviation—a measure of the dispersion of readings from the average—for 72% of that time. Why is this important? The 10-year’s 2.64% yield is now above the current one-standard-deviation mark of around 2.44%, he says. That’s occurred just 12.6% of the time since 1980, but when it did, equity returns were markedly lower than when yields were in the range: The S&P 500 has advanced an average of 2.7% during the 12 months following such an instance, versus an average of more than 10% when yields remain contained within the bands. “The perception of normal rates has come down so much that it might not take a lot to hurt stocks a bit,” Paulsen says.
David Ader, chief macro strategist at Informa Financial Intelligence, takes it a step further: He wonders if you can be bearish on Treasuries—bond prices fall as yields rise—and still be bullish on stocks. He notes that the difference between the 10-year yield and the S&P 500’s dividend yield has widened to about 0.6 of a percentage point in favor of Treasuries. The wider that gap grows, the more enticing bonds will become to investors who still need yield. “My target is 2.85% to 3%,” Ader says. “If we reach that, the equity market will go the other way.”
(Source: Barrons Online)