First-Half Report Card: Modest Gains, Murky Outlook

It's hard to describe single-digit first half returns as a raging bull market, but it's also hard to feel too negative about a six month period when the S&P 500 recorded 22 record highs and virtually everything in your portfolio--including bonds--rose in value. 

 
Key index performance is shown in the table below.

Large cap stocks, represented by the Russell 1000 large-cap index returned 5.12% for the quarter, up 7.27% for the year, while the widely-quoted S&P 500 index of large company stocks gained 4.69% for the quarter and is up 6.05% since January 1.

 

The Russell midcap index was up 4.97% for the quarter, and now stands at a 8.67% gain so far this year.

 

Small company stocks, as measured by the Russell 2000 small-cap index was up 1.95% in the second three months of the year, posting a 3.19% gain in the year's first half.  The technology-heavy Nasdaq Composite Index was up 5.94% for the quarter, and is up 5.30% for its investors so far this year, reaching levels that haven't been seen since March 2000.

 

The rest of the world is not doing as well.   The broad-based EAFE index of larger foreign companies in developed economies rose 2.95% in dollar terms during the second quarter of the year, and is up the same 2.95% so far this year.  The stocks across the Eurozone economies rose 1.90%, and are now up 3.45% for the first half of the year. 

Looking over the other investment categories, real estate investments, as measured by the Wilshire REIT index, rose 7.47% for the quarter, and is standing at a remarkable 18.36% gain for the year.  Commodities, as measured by the S&P GSCI index, rose 2.69% this past quarter, posting a gain of 5.71% for the year.
 

Most market participants and pundits expected bond rates to rise in the first half of the year, but once again bond returns surprised the experts.  The Bloomberg U.S. Corporate Bond Index now has an effective yield of just 2.90%, while comparable yields in the Eurozone stand at 1.64%.
 

Treasury rates took their biggest first-half drop since 2010.  30-year Treasuries have seen their yields fall to 3.36% in the past six months, and 10-year Treasuries currently yield 2.53%.  At the low end, 3-month T-bills are still yielding a miniscule 0.04%; 6-month bills are only slightly more generous, at 0.06%.
 

One of the most interesting questions batted around among professional investors these days is: are these low yields sustainable in the future?  Can they keep dropping?  Won't the appetite for Treasuries finally dry up, forcing rates higher?  If you look at Treasury rates in isolation, current rates seem to be as low as they can go.  But it is also interesting to look at the global bond markets from an international investor's perspective.  Would you prefer to invest in U.S. 10-year Treasuries at 2.53%, or buy comparable Japanese government bonds, yielding just 0.563%.  Are you more attracted to German 10-year bunds, trading at 1.25% yields?  As little as they are yielding today, U.S. government bonds are still pulling in buyers from around the world, both as a safe haven and as a source of higher yields.
 

But depending on where you look, the economic news has been somewhat scary.  The U.S. economy's GDP dropped 2.9% in the first quarter of the year--an enormous hit which has been largely blamed on the weather.  The uncertainty in Iraq, including the recent ISIS capture of a major refinery, has sent the spot price of oil above $107 a barrel on global markets.  Manufacturing activity fell in the past month, and the growth of jobs, which looked promising last year, has slowed down, with the unemployment rate stuck at 6.3%.
 

There are also positive signs, particularly in the statistics for housing demand.  The pending home sales index for contracts to purchase previously-owned U.S. homes rose 6.1% in May, the largest advance since April 2010, when sales were boosted because the homebuyer's tax credit was on the verge of expiration.  The rise in the overall REIT index suggests a strong bounceback in the real estate industry overall. 
 

Even the government seems to be getting its books back in balance.  You won't read about it in the newspapers, but the U.S. federal deficit has fallen from $1.4 trillion to around $400 billion in the space of one year.  And the U.S. is now close to energy self-sufficiency, which means that the trade deficit (which has been largely driven by the cost of importing Middle Eastern oil) is shrinking dramatically vis a vis the rest of the world. 
 

The Michigan Sentiment Index recently hit 82.5, which means that people are generally optimistic about the state of the economy and the world.
 

Where do we go from here?  The future is never clear, but today it might be less clear than usual.  The long bull market that started in March 2009 and the economic expansion that started nearly at the same time are both among the longest since the Civil War.  Bull markets have to end eventually; we all know that.  However, this growth period has been more like a marathon than the usual recovery sprint after a recession; the economy has grown at a 2% annualized rate since 2009, which is below the long-term average, and considerably below what is normal during a recovery from economic malaise.  Marathon runners--at least in theory--can keep moving longer than sprinters.  Is that the case today?  The U.S. Federal Reserve has vowed to keep interest rates low for the next 12 months, and many investors seem to be comfortable with with this approach, believing it could be a recipe for more economic growth, profits and clear stock market sailing in the foreseeable future.
 

The truth is, none of us can tell whether the markets will continue to test records or not.  The best indicator, and it is not something you can pin down, is whether people are still anxious about the future and concerned about the possibility of a market plunge.  So long as people are still worried, the market probably hasn't reached its top.  Whenever you see most investors finally deciding that the market is on a permanent upward climb, whenever everybody finally gives up on worry and puts their money into the hot market, that is when stocks have probably peaked, and an unpleasant surprise awaits those who joined the party too late.
 

Where are we on this scale?  Few investors seem to be enthusiastic about current market valuations, which some believe to be a bit overpriced.  At the same time, the sentiment surveys are in the "complacent" zone, and we are not hearing quite the same shrill tone from perma-bears and pundits who probably feel a bit embarrassed about predicting disaster over and over again as the markets sailed through scary headlines and economic headwinds.
 

This may be the perfect time to celebrate the fact that we've managed to stay invested during fearful times, when government shutdowns, European banking crises and the threat of another meltdown at home were driving others away from the improbable upward trend.  Since 2009, only the brave have stayed the course, and they earned the rewards of what, in retrospect, has been one of the most generous bull markets in U.S. history.  How much more is in store for them, or when the inevitable pullback will come, is not something we mortals are given to know--despite the loud predictions you will hear from economists and pundits whose crystal balls are no more clear than yours.

 

 To Your Prosperity,

 

Kevin Kroskey, CFP®, MBA

 

This article adapted with permission from Bob Veres.

Sources:

Wilshire index data: http://www.wilshire.com/Indexes/calculator/

Russell index data: http://www.russell.com/indexes/data/daily_total_returns_us.asp

S&P index data: http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf--p-us-l--

http://money.cnn.com/2014/06/30/investing/stocks-markets/index.html

Nasdaq index data: http://quicktake.morningstar.com/Index/IndexCharts.aspx?Symbol=COMP

International indices: http://www.mscibarra.com/products/indices/international_equity_indices/performance.html

Commodities index data: http://us.spindices.com/index-family/commodities/sp-gsci

Treasury market rates: http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/

http://blogs.marketwatch.com/thetell/2014/06/30/one-chart-explains-the-unexpected-first-half-treasury-rally/

Aggregate corporate bond rates: https://indices.barcap.com/show?url=Benchmark_Indices/Aggregate/Bond_Indices

Aggregate corporate bond rates: http://www.bloomberg.com/markets/rates-bonds/corporate-bonds/

 

May Monthly Market Commentary

THE MONTH IN BRIEF
U.S. stock indices rose in May, even as some key economic indicators left something to be desired. Most overseas equities markets also saw May gains with Emerging Markets besting all equity asset classes, which has been the case for the last 3 months with Emerging Markets coming in at 7.02% versus 3.97% for the S&P 500.

A 60/40 stock/bond investor using the indices below has received a 4.14% return for 2014 through the end of May.

Key index performance shown in the table below.

 

DOMESTIC ECONOMIC HEALTH
Consumer spending had retreated 0.1% in April, even with consumer incomes up 0.3% for that month. That news from the Commerce Department came 24 hours after Q1 GDP was revised down to -1.0% by the Bureau of Economic Analysis. The BEA’s second Q1 GDP estimate attributed the poorest economic quarter in three years largely to 1.6% slips in business investment and business stockpiles, plus a 6% in exports – that is, not necessarily winter weather.^2,3  

 

Consumer confidence? It was difficult to get a bead on it in May, as the two most respected polls told different stories. The Conference Board’s survey came in at 83.0, a gain of 1.3 points. The University of Michigan’s index fell 2.2 points to 81.9, with decreases in its monthly gauges of present and future expectations.⁴       

 

Consumer prices were rising appreciably – in fact, a 0.3% April rise in the Consumer Price Index took yearly consumer inflation up to 2.0%. (The Producer Price Index advanced 0.6% in that month, putting yearly wholesale inflation at 2.1%.)⁵  

 

The picture was brighter when it came to manufacturing and hiring. Though the nation’s industrial production was down 0.6% in April, overall durable goods orders were up 0.8%. U.S. firms created 288,000 new jobs as the unemployment rate declined to 6.3% (although the rate of unemployed and underemployed Americans was 12.3%). May brought a half-percent advance in the Institute for Supply Management’s factory PMI, which rose to 55.4; in April, ISM’s non-manufacturing PMI improved to 55.0 in April from March’s reading of 54.2.^5,6,7     

 

GLOBAL ECONOMIC HEALTH
Was Abenomics finally ridding Japan of its deflation problem? The latest data seemed encouraging. Prime Minister Shinzo Abe’s “three arrow” economic strategy began with a Bank of Japan commitment to double the nation’s monetary supply in two years; Q1 2014 had seen GDP of 5.9% (thanks to a promise to raise sales taxes by 3% in Q2) and core inflation of 3.2%. While the Bank of Japan wants to see 2% inflation soon, the International Monetary Fund doesn’t see that happening until 2017 or later and just cautioned the central bank against abandoning its stimulus too quickly.⁸  

 

China’s latest official manufacturing PMI also brought good news, rising 0.4 points to 50.8 for May. This marked the third straight month of growth in factory activity, reassuring seeing as the country’s annualized GDP had declined in the first quarter to 7.4%.⁹      

 

The European Union’s factory PMI slipped to 52.2 in May, down 1.2 points from April but still flashing a growth signal. The troubling news: consumer inflation was running at just 0.6% in Germany in May, as opposed to 1.1% a month before. Consumer price indices had also shown declining inflation in Italy, Belgium and Spain, which led analysts to believe that euro area annualized consumer inflation would come in at but 0.5% in May.¹⁰ 

 

WORLD MARKETS
Few stock benchmarks lost ground in May. Russia’s RTS rebounded 12.12% and Spain’s IBEX rose 3.25%; elsewhere in Europe, the DAX rose 3.54%, the CAC 40 0.72% and the FTSE 100 0.95%, with Italy’s FTSE MIB down 0.71%. Further west, May gains came for the Merval (13.72%) and the IPC All-Share (1.60%) while the S&P/TSX Composite retreated 0.33%. In the east, May saw an 8.03% jump for India’s Sensex, a 2.29% gain for the Nikkei 225, a 4.28% climb for the Hang Seng, a rise of 2.85% for Pakistan’s KSE 100 and advances of 1.69% for the Kospi and 0.63% for the Shanghai Composite.¹  

 

As for the regional and multinational indices, the Europe Dow was the laggard with a loss of 0.23%. May advances came for the Asia Dow (3.90%), Global Dow (1.67%), MSCI World Index (1.63%), MSCI Emerging Markets Index (3.26%) and STOXX 600 (1.88%).^1,11         

 

COMMODITIES MARKETS

NYMEX crude climbed 3.25% for the month to settle at $102.71 on May 30. Other energy futures retreated: unleaded gasoline lost 0.96%, heating oil 1.59% and natural gas 5.01%. Losses also came to the farm: soybeans slipped 2.21%, cotton 8.58%, corn 9.24%, wheat 11.78% and coffee 13.98%. A couple of key crops advanced for May: sugar went +0.81%, cocoa +2.62%.¹²    

 

Gold and silver futures both lost some ground in May. Gold’s 3.23% descent led to a May 30 COMEX close of $1,245.60; silver ended the month at $18.68, losing 2.04%. Copper gained 4.22% for May while platinum advanced 1.83%. As for the U.S. Dollar Index, it rose 1.13% for May.^12,13      

 

REAL ESTATE
Both new and existing home sales improved in April. The Commerce Department recorded a 6.4% rise in purchases of new homes, while the National Association of Realtors announced a 1.3% gain in residential resales. NAR also said that pending home sales were up for a second straight month in April, rising 0.4%.^2,14    

 

April also brought more groundbreaking. Housing starts rose 13.2%, powered by a gain of almost 40% in the apartment category. Building permits were up 8.0%, again in large part due to multifamily projects getting off the drawing board.¹⁵ 

 

While the monthly numbers were solid, the year-over-year numbers were less impressive. Annually, new home sales were down 4.2% as of April; the pace of existing home sales had declined 6.8%, with the seasonally adjusted annual rate projecting to 4.65 million sales (compare that with 5.5 million in a healthy market). Existing home sale prices did rise 5.2% in a year to $201,700; the S&P/Case-Shiller home price index saw its overall annual gain slip from 12.9% in February to 12.4% in March.^2,14      

 

Where did mortgage rates stand at the end of May? We turn to Freddie Mac’s Primary Mortgage Market Survey, specifically the May 1 and May 29 editions. On May 29, the average rate on a 30-year FRM was only 4.12%. The average interest on the 15-year FRMs was but 3.21%. Rates on 5/1-year ARMs averaged 2.96%, rates for 1-year ARMs 2.41%. Compare the May 1 numbers: 30-year FRMs, 4.29%; 15-year FRMs, 3.38%; 5/1-year ARMs, 3.05%; 1-year ARMs, 2.45%.¹⁶      

 

LOOKING BACK…LOOKING FORWARD
More buying than selling, and not much fear – that is the simple summation of May on Wall Street. The CBOE VIX ended the month at a low, low 11.40, plunging 14.99%.¹   

 

In addition to the Dow’s aforementioned gain, the three other closely watched U.S. indices also advanced for the month – the NASDAQ rose 3.11% to 4,242.62, the S&P 500 2.10% to 1,923.57 and the Russell 2000 0.68% to 1,134.50. At the end of the month, the S&P appeared on pace for a pretty good year.¹

 

   

UPCOMING ECONOMIC RELEASES: Coming up in June, we have: the May ISM services PMI and a new Federal Reserve Beige Book (6/4), the May Challenger job cuts report (6/5), the Labor Department’s May employment report (6/6), April wholesale inventories (6/10), April business inventories and May retail sales (6/12), the University of Michigan’s initial June consumer sentiment index and the May PPI (6/13), May industrial output (6/16), May’s CPI plus May housing starts and building permits (6/17), a Fed policy statement (6/18), the Conference Board’s May leading indicator index (6/19), May existing home sales (6/23), May new home sales, the Conference Board’s June consumer confidence index and April’s FHFA and Case-Shiller home price indices (6/24), May durable goods orders and the final Q2 GDP estimate from the Bureau of Economic Analysis (6/25), May consumer spending (6/26), the University of Michigan’s final June consumer sentiment index (6/27), and May pending home sales (6/30).

 

To Your Prosperity,

 

Kevin Kroskey, CFP®, MBA

This article adapted with permission from MarketingLibrary.net.
Citations.

1 - online.wsj.com/mdc/public/page/2_3023-monthly_gblstkidx.html [5/30/14]

2 - marketwatch.com/economy-politics/calendars/economic [5/30/14]

3 - bbc.co.uk/news/business-27631286 [5/30/14]

4 - stltoday.com/business/local/consumer-sentiment-falls-more-than-forecast-in-may/article_63c11168-f904-5c91-872f-fafeebd1dc79.html [5/30/14]

5 - investing.com/economic-calendar/ [6/2/14]

6 - blogs.wsj.com/economics/2014/05/02/highlights-from-the-april-jobs-report/ [5/2/14]

7 - bloomberg.com/news/2014-06-02/ism-corrects-u-s-may-factory-index-to-56-after-adjustment-error.html [6/2/14]

8 - fxstreet.com/analysis/week-in-fx/2014/06/01/02/ [6/1/14]

9 - cbsnews.com/news/china-manufacturing-growth-grows-for-third-month/ [6/2/14]

10 - tinyurl.com/q2wnfnp [6/2/14]

11 - mscibarra.com/products/indices/international_equity_indices/gimi/stdindex/performance.html [5/30/14]

12 - money.cnn.com/data/commodities/ [5/30/14]

13 - online.wsj.com/mdc/public/npage/2_3050.html?mod=mdc_curr_dtabnk&symb=DXY [6/2/14]

14 - abcnews.go.com/Business/wireStory/us-home-sales-rose-64-percent-april-23841519 [5/23/14]

15 - usatoday.com/story/money/business/2014/05/16/april-housing-starts/9134725/ [5/16/14]

16 - freddiemac.com/pmms/pmms_archives.html [6/2/14]

17 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=5%2F30%2F13&x=0&y=0 [5/30/14]

17 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=5%2F30%2F13&x=0&y=0 [5/30/14]

17 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=5%2F30%2F13&x=0&y=0 [5/30/14]

17 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=5%2F29%2F09&x=0&y=0 [5/30/14]

17 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=5%2F29%2F09&x=0&y=0 [5/30/14]

17 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=5%2F29%2F09&x=0&y=0 [5/30/14]

17 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=6%2F1%2F04&x=0&y=0 [5/30/14]

17 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=6%2F1%2F04&x=0&y=0 [5/30/14]

17 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=6%2F1%2F04&x=0&y=0 [5/30/14]         

18 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [6/2/14]

19 - americasmarkets.usatoday.com/2014/06/02/can-surging-stocks-avoid-june-swoon/ [6/2/14]
 

April Monthly Market Commentary

THE MONTH IN BRIEF
Another month, another minor gain for stocks. The Q1 earnings season didn’t give the S&P 500 much of a lift – the index advanced 0.62% for April. Small caps were hit hard during the month. Indices in the Americas and Europe largely outperformed Asian benchmarks. COMEX gold gained in April, but NYMEX crude did not. Last month saw a major drop in new home sales, but only a fractional decrease in existing home sales. An important consumer sentiment index surged north, but a respected consumer confidence index declined. As April wrapped up, worries about a Russian takeover of Ukraine reemerged.¹    

Key index performance is shown in the table below. You'll note real estate (REITs) has continued to do well after being oversold in late 2013.

 

DOMESTIC ECONOMIC HEALTH
Were Americans feeling upbeat about the economy in April ... or not? It was hard to tell from the two most esteemed household surveys. The University of Michigan’s consumer sentiment index hit a 9-month peak in April, rising to 84.1 from March’s final reading of 80.0; on the other hand, the Conference Board’s survey of consumer confidence declined 1.6 points last month to 82.3.^2,3      

Payrolls expanded by 288,000 new hires in April and the jobless rate fell to 6.3%. The sour note: the sharp drop in unemployment was mostly because fewer people looked for work. The U-6 rate (unemployment + underemployment) was still up at 12.3%, no doubt a troubling factoid for the Federal Reserve.⁴

Walking randomly up Main Street, further March indicators show a 1.1% rise in retail sales and a 0.2% increase in the Consumer Price Index. (The headline CPI was up 1.5% in a year.) Consumers spent 0.9% more in March as wages rose 0.5%.^3,5

Even with that significant consumer spending boost, the economy hardly grew in Q1. In its initial estimate, the Bureau of Economic Analysis measured first quarter GDP at 0.1% – not exactly the 1.2% growth projected by analysts in a Bloomberg poll, and a far cry from the 2.6% GDP of Q4.⁶

The Institute for Supply Management’s factory PMI was at a healthy 53.7 in March and an even healthier 54.9 in April; by April, the factory sector had expanded for 11 straight months. ISM’s service sector PMI came in at 53.1 for March. The third month of the year saw a 2.6% pickup in durable goods orders, with the gain at 2.2% minus defense industry orders. Wholesale inflation increased, too – the 0.5% March rise in the Producer Price Index took the yearly rise in PPI up to 1.4%.^3,7,8

Last but not least, the Fed announced another $10 billion cut in QE3 come May, reducing its monthly economic stimulus to $45 billion. Its April 30 statement reiterated that it would keep the main U.S. interest rate near zero for a “considerable time” after the end of its extraordinary asset purchase campaign.⁶

GLOBAL ECONOMIC HEALTH

Was Russia poised to take over Ukraine? Tensions heightened between the nations as April ended, with Russian separatists staging protests and taking foreign military observers hostage. In late April, the EU expanded its economic sanctions against Russia and Standard & Poor’s downgraded the nation’s debt rating to BBB- (a step above junk). NATO’s top commander, U.S. Air Force General Phillip Breedlove, reminded the press that “highly organized, highly supported forces [were] in place” if Russia wished to mount a full-scale invasion. While the ruble was down more than 7% YTD against the dollar as April ended, Russian officials spoke of a retaliatory economic response against the EU and the United States. (Since so many eurozone nations depend on energy imports from Russia, the EU has so far refrained from truly harsh sanctions against the country.)⁹

At least the global manufacturing picture looked a bit brighter. China’s official purchasing manager index ticked north a tenth of a percent to 50.4 in April, and last month found South Korean exports up 9% year-over-year. The United Kingdom’s Markit manufacturing PMI rose 1.5 points to 57.3 for April, while Germany’s official factory PMI advanced to 54.2. The overall euro area manufacturing PMI rose slightly to 53.3 last month.^10,11

WORLD MARKETS

Major indices in the Americas went mostly green last month. April brought gains of 0.62% for the IPC All-Share, 6.40% for the Merval, 2.21% for the TSX Composite and 2.40% for the Bovespa. Asia Pacific indices were up and down – KSE 100, +6.45%; PSE Composite, +4.34%; ASX 200, +1.75%; Asia Dow, +0.52%; Sensex, +0.14; Hang Seng, -0.08%; Shanghai Composite, -0.35%; Kospi, -1.20%; Nikkei 225, -3.53%. Aside from a 5.74% drop for Russia’s RTS, key indices in Europe mostly advanced – the DAX rose 0.50%, the CAC 40 2.18%, the STOXX 600 1.07%, the FTSE 100 2.75% and the Europe Dow 0.72%.¹  

The Global Dow was up 0.75% for April; the MSCI Emerging Markets Index rose just 0.06%, but the MSCI World Index gained 0.83%.^1,12

COMMODITIES MARKETS

At the end of April, a barrel of oil was worth $99.74 on the NYMEX, an ounce of gold $1,295.90 on the COMEX. Commodity performance was mixed for the month, with some of the biggest gains unsurprisingly coming in crops.¹³ 

Coffee was out front in April, with futures rising 16.48%. Cotton gained 1.28%, soybeans 4.62%, cocoa 1.22%, and corn 2.34%; sugar fell 4.59% for the month. Thoughts of possible interruption of natural gas supplies in Europe sent those futures 9.73% higher in April; unleaded gasoline futures also rose 1.57%. Heating oil futures retreated 0.19% in April, and oil futures pulled back 1.79%.¹³  

Copper (-0.71%) and silver (-3.34%) did not advance in April, but gold (+0.67%) and platinum (+0.76%) did. The U.S. Dollar Index lost 0.75% in April and settled at 79.47 to end the month.^13,14

REAL ESTATE

Was the housing market stalling out? Or just having a seasonal slump? The March home sales numbers certainly paled in comparison to a year ago, with reduced inventory and higher interest rates exerting their influence. The Census Bureau reported a 14.5% drop in new home purchases; the National Association of Realtors announced a mere 0.2% dip in resales. A bright spot surfaced: NAR also measured a 3.4% gain in pending home sales, the first increase since June. ³

As for home prices, the annual increase recorded by the S&P/Case-Shiller index decreased to 12.9% in the February edition from the previous 13.2%. On a monthly basis, the Case-Shiller was flat. NAR recorded a median existing home sales price of $198,500 in March, up 7.9% year-over-year. On the construction front, a 2.8% March boost in housing starts was offset by a 2.4% fall for building permits.^3,15

In Freddie Mac’s March 27 Primary Mortgage Market Survey, average interest rates for various home loans were as follows: 30-year FRMs, 4.40%; 15-year FRMs, 3.42%; 5/1-year ARMs, 3.10%; 1-year ARMs, 2.44%. On May 1, most of those numbers were lower, with average rates on 30-year FRMs at 4.29%, 15-year FRMs at 3.38%, 5/1-year ARMs at 3.05%, and 1-year ARMs at 2.45%.¹⁶

LOOKING BACK…LOOKING FORWARD
The Dow wrapped up April with a fresh record close of 16,580.84 and the S&P 500 ended the month near its all-time peak at 1,883.95. The Nasdaq concluded April at 4,114.56. A 3.94% April descent left the Russell 2000 at -3.16% YTD. The CBOE VIX fell 3.39% last month to end April at -2.26% YTD.¹

As the trading day ended April 30, 310 S&P 500 member firms had announced quarterly results, with 75% of them exceeding profit forecasts and 52% of them beating sales projections. Analysts tracking profits for Bloomberg estimated that profits for S&P 500 companies improved 3.4% in the first quarter.⁶ 

There definitely seems to a sentiment that the U.S. economy is growing stronger and stronger, and improving jobs data and a spring pickup in home sales would add to that perception. The key question is are the market expectations for the U.S. economy and stock prices above what will be the realized level. If so, that doesn't bode well for U.S. stock prices.

To Your Prosperity,

 

Kevin Kroskey, CFP®, MBA

This article adapted with permission from MarketingLibrary.net, Inc.

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12 - mscibarra.com/products/indices/international_equity_indices/gimi/stdindex/performance.html [4/30/14]
13 - money.cnn.com/data/commodities/ [4/30/14]
14 - online.wsj.com/mdc/public/npage/2_3050.html?mod=mdc_curr_dtabnk&symb=DXY [5/1/14]
15 - realtor.org/news-releases/2014/04/existing-home-sales-remain-soft-in-march [4/22/14]
16 - freddiemac.com/pmms/pmms_archives.html [5/1/14]
17 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=4%2F1%2F13&x=0&y=0 [4/30/14]
17 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=4%2F1%2F13&x=0&y=0 [4/30/14]
17 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=4%2F30%2F13&x=0&y=0 [4/30/14]
17 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=3%2F31%2F04&x=0&y=0 [4/30/14]
17 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=3%2F31%2F04&x=0&y=0 [4/30/14]
17 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=4%2F30%2F04&x=0&y=0 [4/30/14]         
18 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [5/1/14]
 

2014 First Quarter Market Review

The U.S. stock market reported very modest gains in the first quarter of the year, and it was actually uncertain until the final trading day whether the quarterly returns would be slightly positive or negative. In the end, the Wilshire 5000 index--the broadest measure of U.S. stocks and bonds--rose 2.04% in the first three months of the year. The comparable Russell 3000 index eked out a 1.97% gain in 2014's first quarter.

Large cap stocks, represented by the Wilshire U.S. Large Cap index, gained 1.95% in the first quarter. The Russell 1000 large-cap index returned 2.05%, while the widely-quoted S&P 500 index of large company stocks gained 1.30% in the first three months of the year.

The Wilshire U.S. Mid-Cap index index rose 3.75%, while the Russell midcap index gained 3.53% for the quarter.

Small company stocks, as measured by the Wilshire U.S. Small-Cap, gained a remarkable 2.57% for the quarter. The comparable Russell 2000 small-cap index rose 1.12% in the first three months of the year. The technology-heavy Nasdaq Composite Index lost half a percent over the same time period. 

Looking abroad, the broad-based EAFE index of large international companies in developed economies--Europe, the Far East and Australia--was exactly flat for the quarter, with 0% returns. The Eurozone markets reported a 1.89% gain year to date, but the Asian markets did not far well in the most recent three months. Japan was down 9.8% in the first quarter of the year, and China's markets have lost 7.5% of their value. Meanwhile, the less-developed nations continued their slide, with the EAFE emerging markets index down .80%.

We regret that we were not astute enough to bet the farm on the quarterly performance of the troubled market in Egypt, which unexpectedly delivered a robust 21.7% return through March 31. But we also managed to avoid a high concentration in Russian stocks, which are down 17.8% so far this year, in part due to well-deserved sanctions over the invasion of Crimea, in part due to persistently low oil and gas prices. 

Bonds are still yielding far less than their historical averages, and the trend has been interesting. Treasury bills with 3-month and 6-month maturities are yielding less than they did at this time last year, with rates of 0.03% and 0.05% respectively. Longer-term Treasuries have seen rates drop modestly to 0.12% (1-year), 2.73% (10-year) and 3.52% (30-year). Corporate bonds have also dropped a bit; you can now buy 10-year AAA rated corporates and get a 3.13% yield, or go out 20 years and get 3.97%. This, of course, confounds the experts who have been predicting for more than five years that rates are going to rise dramatically, decimating bond portfolios.

Commodities, as measured by the S&P GSCI gauge of 24 commodities, gained 2.6% over the quarter. Real estate investment trusts, a proxy of real estate investments as measured by the MSCI US REIT Index, were up 9.13% in the first quarter, despite losing ground in the month of March. The Wilshire REIT Index rose 10.13% for the quarter.

When you look at the returns of 2014's first quarter in the context of the long bull market recovery from the Great Recession, you can't help seeing a bit of a slowdown. The markets did rise for the quarter, but it was a pretty choppy ride, and it's hard to find any reputable commentator who is predicting another 30+% return this year. You are, instead, hearing a lot of speculation about whether the bull market is about to end, and the markets will "correct"--Wall Street speakese for a 20% downturn.

The evidence for a correction is that, compared to some traditional measures, stocks are at least fairly priced and they may be trading at above the prices we consider to be historical norms. The chart showing the 10-year normalized PE ratio shows that the S&P 500 at more than 25 and above an average figure of 16.53. This is in the 'expensive category' historically, but it is clearly not at the top of one of those mountains that you see in the 1929 and 2000 market tops. Others worry that certain drivers of U.S. economic growth may be slowing down, even though the most recent reports show continuing gains in employment and growth in factory orders. Housing starts and sales have come down modestly from this time last year, and wages are not rising.    

On the other side, you are seldom near a market top when many people are speculating that you are. Market tops seem to have the magical ability to silence doubters precisely when they should be most doubtful, and investors are seldom cautious near the peaks. Moreover, the fact that small and midcap equities outgained large caps suggests that the companies that depend on the U.S. economy are strengthening a bit, while the least strong U.S. firms are those which are dependent on profits overseas.

This leads to another type of speculation. Some analysts wonder if foreign stocks will provide higher returns than the U.S. markets over the next cycle. As you can see from the chart, where the mountains above the line are time periods when U.S. stocks outgained their foreign counterparts, there is an ongoing see-saw, where American returns beat the rest of the world, and then the rest of the world returns the favor for sustained periods of time. The U.S. has been winning lately, and is clearly winning so far this year, but how long will that last?

 

The problem with all of this analysis is that it is really speculation about the unknowable future. When markets get slightly overvalued, history tells us that they can get much more expensive as markets climb rapidly toward frothy tops, and those who trimmed back on their stock exposure are kicking themselves for missing those extra returns. History also tells us that corrections and bear markets never announce themselves in advance. If stocks go on sale in the next quarter or two, it will give us a chance to buy more on the cheap. If they go up, we will report the good news and experience a renewed sense of caution while less seasoned investors grow more enthusiastic.
 

To Your Prosperity,

 

Kevin Kroskey, CFP®, MBA

 

This article adapted with permission from Bob Veres.
 

Has a Market Correction Started and Should I Worry?

The markets have been volatile -- to the downside; who minds upside volatility, right? -- to start 2014. The S&P 500 was down -3.46% for January and the MSCI All Country World Index -- a good barometer for the global equity markets -- was down -4.00%. This was enough to cause pundits and investors to ask whether we are now in the early stages of a bear market or, indeed, if the past almost-five years should be considered an interim market rally inside of a longer-term bear market.

The answer, of course, is that nobody knows--not the brainiac Fed economists, not the fund managers and certainly not the pundits.  A Wall Street Journal article noted that most of the sellers were short-term investors who were involved in program trading, selling baskets of stocks to protect themselves from short-term losses.  Roughly translated, that means that a bunch of professional traders panicked for example when they learned that Chinese economic growth is slowing down on top of worries that the Fed is buying bonds at a somewhat less furious rate ($75 billion a month vs. $85 billion) than it was last year. 

What we DO know is that it is often a mistake to sell into market downturns, which happen more frequently than most of us realize.  A lot of people might be surprised to know that in the Summer of 2011, the markets had pulled back by almost 20%--twice the traditional definition of a market correction--only to come roaring back and reward patient investors.  There were corrections in the Spring of 2010 (16%) and the Spring of 2012 (10%), but almost nobody remembers these sizable bumps on the way to new market highs.  Indeed, most of us look back fondly at the time since March of 2009 as one long largely-uninterrupted bull market.

Bigger picture, since 1945, the market has experienced 27 corrections of 10% or more, and 12 bear markets where U.S. equities lost at least 20% of their value.  The average decline was 13.3% over the course of 71 trading days.  Perhaps the only statistic that really matters is that after every one of these pullbacks, the markets returned to record new highs.  The turnarounds were always an unexpected surprise to most investors.

We may get a full 10% correction or even a full bearish period out of these negative trading days, and we may not.  But the history lesson suggests an important lesson: if we DO get a correction or a bear market, we may not remember it a few years later if the markets recover as they always have in the past.  The people who lose money in the long term are not those who endure a painful market downturn, but the people who panic and sell when the market turns down.

It is most likely wise to temper market expectations as many asset types still look expensive. (See: Investment Returns: What Should We Expect Going Forward?) Expected returns whether rich or more modest will be realized over time. Short-term market movements are impossible to predict.  Mistaking activity within your investment accounts gives the illusion of control but most often at the expense of realizing less than the expected returns the market will bear to the patient.

To Your Prosperity,

Kevin Kroskey, CFP®, MBA

This article adapted with permission from Bob Veres.

Sources:

http://finance.yahoo.com/blogs/the-exchange/stocks-plunge-in-u-s---dow-sinks-more-than-280-points-205935575.html

http://www.bloomberg.com/news/2014-01-16/crashes-corrections-and-monday-s-bear-market-.html

http://www.bloomberg.com/news/2014-01-23/the-bull-market-ends-or-is-it-just-a-correction-.html