Kevin Kroskey's Market Commentary

2014 Third Quarter Market Review

You could say that the markets took a breather in the third quarter of 2014, but you would come to that conclusion only if you looked at the overall returns and ignored the drama of the past 30 days. The markets experienced a difficult month of September, giving up some of the gains from the prior eight months and causing investors to worry that we’re about to experience more of the same. The end of the month was especially difficult, with a general market slide starting September 22, and some indices dropping more than 1% on the final day.

Key index performance is shown in the table below.

The Wilshire 5000--the broadest measure of U.S. stocks and bonds--rose a meager 0.37% for the third quarter even as it lost 1.71% in September. But the index is hanging on to a 7.26% gain for the year.

Large cap stocks were the market leaders over the past three months, but the gains were modest. The news was less happy for smaller stocks. Small company stocks, as measured by the Russell 2000 Index fell 7.60% in the third quarter, representing its worst quarter in three years.

The rest of the world put a drag on diversified investment portfolios. The broad-based EAFE index of companies in developed economies fell 3.84% in dollar terms during the third quarter of the year, and is now down 1.38% so far in 2014. The stocks across the Eurozone economies contributed to the foreign stock slide, but the red ink spilled over to most of the foreign indices in Asia as well.

Looking over the other investment categories, real estate investments, as measured by the Wilshire REIT index, fell 2.54% for the quarter, but the index is standing at a robust 15.08% gain for the first three quarters of the year. Commodities, as measured by the S&P GSCI index, fell 12.46% this past quarter, and now sit at a loss of 7.46% for the year.

The expected rise in bond rates never materialized, confounding the experts yet again. The Barclays aggregate bond index has return 4.10% year-to-date. The Bloomberg U.S. Corporate Bond Index now has an effective yield of 3.07%, while Treasury rates held steady. 30-year Treasuries are yielding 3.20%, and 10-year Treasuries currently yield 2.50%. At the low end, 3-month T-bills are still yielding a miniscule 0.02%; 6-month bills are only slightly more generous, at 0.04%.

Nobody seems to have a convincing explanation for the recent stock market slump. The economy still seems to be pushing along in a long slow, steady growth process, and corporate earnings are well-above historical averages. Oil prices are at their lowest level since November 2012, consumer spending has rebounded, and although the Fed will cease its bond purchases this month, there is no indication that it is going to sell its inventory back on the market, and its policymakers are projecting low interest rates well into 2015. Corporate cash at larger corporations is near an all-time high.

But pullbacks don’t always reflect reality. They are also affected by the sentiment of investors--in other words, human emotions and a crowd (or herd) mentality. Investors seem to be worried that stocks are overdue for a correction, and if these things operated on a schedule, they would be right. We are in the fourth-longest bull market since 1928, without having experienced even a small 10% correction since 2011. The Conference Board reported that U.S. Consumer Confidence slipped dramatically, and unexpectedly, in September, lending some credibility to the surmise that the investing herd has been startled--and their expectations appear to be creating market reality.

Does that mean we should take action? Unfortunately, nobody knows whether the markets are poised to act on the good economic news and move up, or are ready for another fearful selloff that would finally deliver that long-delayed correction. History tells us that it’s a fool’s game to try to anticipate market corrections, and that investors usually get rewarded for sailing through choppy waters, rather than jumping off the ship when the waves get higher.

You can’t know in which direction the markets will experience their next 10%, 20% or 30% move. But unless you believe the world is about to end, you do know, with some degree of certainty, in which direction it will make its next 100% move.

Now is a good time to re-examine your expectations for investment returns and always be mindful of your planning and when you'll need money. The purpose of your investment portfolio is to make your financial life plan work and meet the cash flows you and your advisor define.

If you have a plan in place, you're much more likely to behave rationally and proactively than react in an unprudent manner to bad news.

To Your Prosperity,

Kevin Kroskey, CFP®, MBA

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/2014/09/30/investing/stocks-market-september-slump/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/

August Monthly Market Commentary

THE MONTH IN BRIEF

August was a good month for stocks. The S&P 500 surpassed 2,000 while logging a 3.77% monthly advance. Even with ISIS controlling parts of Iraq and Syria and Russia possibly conducting a stealth invasion of Ukraine, Wall Street retained its optimism. The rally in stocks wasn’t matched by gains for oil and gold and the housing market was cooler than it was last summer. Most U.S. indicators signaled a healthier economy, perhaps one strong enough to motivate the Federal Reserve to raise interest rates a bit sooner than forecast.

Key index performance is shown in the table below.

DOMESTIC ECONOMIC HEALTH

Commerce Department data showed consumer spending unexpectedly ticking down 0.1% in July, even with personal wages rising 0.2% - and seasonally adjusted retail sales were also flat. If households were retaining more of their incomes than expected, they were also more confident in August than they had been the previous month. The Conference Board’s August consumer confidence index hit 92.4 (blowing past the Briefing.com forecast of a descent to 88.0) and the University of Michigan’s consumer sentiment index ended August with a climb to 82.5.^2,3

The latest Consumer Price Index showed inflation running right at the Fed’s target: an annual increase of 2.0%, with a July gain of 0.1%. (The core CPI was up 1.9% in a year and 0.1% in July.) Wholesale prices also rose 0.1% in July, putting the year-over-year increase at just 1.7%.^4,5

American manufacturing was clearly very healthy this summer. The Federal Reserve announced a 1.0% July increase in factory production (the best month for the indicator since February) with an impressive 10.1% July jump in car manufacturing (a 5-year peak). Thanks to a huge request for new planes at Boeing, overall hard goods orders improved 22.6% in July.^5,6

Indeed, the Institute for Supply Management’s August factory PMI affirmed the Fed’s findings: it reached 59.0, the best reading since March 2011. Weeks prior, ISM’s service sector PMI had come in at 56.0, up 1.6 points from June.^7,8

Perhaps the best news of all was the pace of hiring. In July, U.S. employers added more than 200,000 jobs for a sixth straight month. That hadn’t happened in 17 years. Another good thing about July’s 209,000 new hires: according to Labor Department data, 47,000 entered business and professional positions.⁹

Finally, second quarter growth was judged even better than previously thought. Toward the end of August, the Commerce Department revised Q2 GDP from 4.0% to 4.2%. Capital spending was up 8.4% during the quarter.¹⁰

GLOBAL ECONOMIC HEALTH

Had Russia invaded Ukraine under the pretense of offering humanitarian aid? If so, the economic reaction to that incursion was still relatively localized. At the end of the month, NATO reported it had footage of Russian combat units operating within Ukraine’s borders – and still, U.S. stocks seemed unaffected. Sanctions imposed on Russia did perhaps affect the eurozone Markit PMI, which ticked down to 50.7 in August.^11,12

China’s HSBC factory PMI flirted with contraction at 50.2 – not exactly encouraging news from the globe’s top market for commodities. The PRC’s official PMI was at 51.1 last month, underneath July's 51.7 mark. Japan’s PMI increased 1.7 points last month to 52.2.¹²

Markets also took the threats posed by ISIS in stride in August. Fears of oil output being presently disrupted in Iraq were muted. Even though the largest exporter of energy supplies outside the Middle East – Russia – was in a conflict of its own, there was no leap in energy prices. In part, that can be attributed to record output from the U.S. and reduced demand given the eurozone’s lingering recession and China’s economic engines revving down slightly this year.¹³

WORLD MARKETS

In terms of indices, some of the best August performances occurred in the Americas. Brazil’s Bovespa jumped 9.78% and Argentina’s MERVAL soared 19.90%. Mexico’s IPC All-Share rose 4.13% while Canada’s S&P/TSX Composite gained a mere 1.92%. The major European national bourses also recorded advances – 0.67% for the DAX, 3.18% for the CAC 40, 1.33% for the FTSE 100. In the Asia Pacific region, benchmarks were up and down in August – losses of 1.26% for the Nikkei 225 and 0.37% for the Kospi, gains of 2.87% for the Sensex, 2.71% for the PSE and 0.71% for the Shanghai Composite. Vietnam’s VN-Index notably advanced 6.81% last month. The Hang Seng and S&P/ASX 200 respectively posted tiny August losses (0.06% for the former, 0.12% for the latter).¹

COMMODITIES MARKETS

Last month, cotton went +8.87% to register the biggest gain among major commodities. Soybeans went -10.93% to rack up the largest August loss. As for the rest of the ag futures, the month played out like this: wheat, +3.40%; corn, +0.98%; cocoa, + 1.25%; coffee, -0.89%; sugar, -5.89%.¹⁵

As for metals, gold managed a 0.31% August gain, yet silver lost 5.76%, platinum 2.85% and copper 2.76%. Gold ended the market month at $1,287.40 on the COMEX, silver finishing at $19.49. Turning to the buck, the U.S. Dollar Index gained 1.58% to settle at 82.75 on August 29. Oil slid 1.85% for August; at the close on August 29, NYMEX crude was worth $95.96 per barrel. Heating oil retreated 0.95% last month while unleaded gasoline lost 1.40%; natural gas futures certainly looked good, rising 6.69%.^15,16

REAL ESTATE

Annual home price gains were clearly leveling off, with the 20-city Case-Shiller home price index showing an 8.1% yearly gain in its June edition compared to 9.4% a month earlier. The National Association of Realtors announced a 2.4% rise in residential resales for July plus a 3.3% increase in pending home sales. New home buying was down 2.4% for the month, according to the Census Bureau.^2,8

July brought a lot of groundbreaking. According to Census Bureau data, housing starts increased 15.7% for the month, and there was also an 8.1% rise for building permits.⁸

Conventional home loans got a touch cheaper during August, with Freddie Mac calculating the average interest rate on the 30-year FRM at 4.10% in its August 28 Primary Mortgage Market Survey. That compared to 4.12% on July 31. Interest rates for 5/1-year ARMs also declined from 3.01% to 2.97% in that period. Average interest rates on the 15-year FRM (3.23% to 3.25%) and 1-year ARM (2.38% to 2.39%) increased in that stretch.¹⁷

LOOKING BACK…LOOKING FORWARD

Though the headlines carried news of some fairly significant geopolitical crises in August, Wall Street wasn’t all that anxious about them. One telling sign is the S&P rising to an all-time record; another is the CBOE VIX, the so-called “fear index,” closing down at 11.98 on August 29 (the final market day of the month).¹

While the VIX sank 29.32% in August, the key U.S. stock indices all gained 3% or more. The Nasdaq rose 4.82%, the Russell 2000 4.85%, and the Dow 3.23%. At the close on August 29, the S&P settled at 2,003.37, the DJIA at 17,098.45, the NASDAQ at 4,580.27 and the RUT at 1,174.35.1

UPCOMING ECONOMIC RELEASES: The rest of September presents the following reports and announcements: ISM’s August services PMI, the August ADP employment report and the August Challenger job cuts report (9/4), the Labor Department’s August jobs report (9/5), July wholesale inventories (9/10), July business inventories, August retail sales and the University of Michigan’s initial September consumer sentiment index (9/12), August industrial production (9/15), the August PPI (9/16), the latest Federal Reserve policy statement and the August CPI (9/17), August housing starts and building permits (9/18), the Conference Board’s August leading indicator index (9/19), August existing home sales (9/22), August new home sales (9/24), August durable goods orders (9/25), the final estimate of Q2 GDP and the final September consumer sentiment index from the University of Michigan (9/26), August pending home sales and personal spending (9/29), and finally the July Case-Shiller home price index and the Conference Board’s September consumer confidence index (9/30).

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 [8/29/14]
2 - biz.yahoo.com/c/ec/201435.html [9/2/14]
3 - foxbusiness.com/economy-policy/2014/08/13/us-retail-sales-basically-flat-in-july-recent-job-growth-fails-to-boost/ [8/13/14]
4 - reuters.com/article/2014/08/19/us-usa-economy-inflation-idUSKBN0GJ15U20140819 [8/19/14]
5 - reuters.com/article/2014/08/15/us-usa-economy-prices-idUSKBN0GF11G20140815 [8/15/14]
6 - marketwatch.com/story/durable-goods-orders-jump-226-in-july-on-boeing-contracts-2014-08-26 [8/26/14]
7 - ism.ws/ismreport/mfgrob.cfm [9/2/14]
8 - investing.com/economic-calendar/ [9/2/14]
9 - marketwatch.com/story/us-adds-209000-jobs-in-july-to-keep-hot-streak-intact-2014-08-01 [8/1/14]
10 - abcnews.go.com/Business/wireStory/revised-estimate-q2-growth-stay-solid-25155529 [8/28/14]
11 - tinyurl.com/omb5ll2 [7/1/14]
12 - fxstreet.com/analysis/za-today/2014/09/02/ [9/2/14]
13 - investing.com/analysis/the-world%E2%80%99s-on-fire:-5-risks-to-watch-224521 [9/2/14]
14 - mscibarra.com/products/indices/international_equity_indices/gimi/stdindex/performance.html [8/29/14]
15 - money.cnn.com/data/commodities/ [9/1/14]
16 - online.wsj.com/mdc/public/npage/2_3050.html?mod=mdc_curr_dtabnk&symb=DXY [9/1/14]
17 - freddiemac.com/pmms/archive.html [9/2/14]
18 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=8%2F29%2F13&x=0&y=0 [8/29/14]
18 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=8%2F29%2F13&x=0&y=0 [8/29/14]
18 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=8%2F29%2F13&x=0&y=0 [8/29/14]
18 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=8%2F28%2F09&x=0&y=0 [8/29/14]
18 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=8%2F28%2F09&x=0&y=0 [8/29/14]
18 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=8%2F28%2F09&x=0&y=0 [8/29/14]
18 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=8%2F30%2F04&x=0&y=0 [8/29/14]
18 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=8%2F30%2F04&x=0&y=0 [8/29/14]
18 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=8%2F30%2F04&x=0&y=0 [8/29/14]
19 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [9/2/14]
20 - marketwatch.com/story/heres-what-history-says-about-the-stock-market-in-september-2014-08-29 [8/29/14]

July Monthly Market Commentary

THE MONTH IN BRIEF
Stocks seemed set for just a slight July loss until developments on the last day of the month rattled Wall Street. Argentina effectively defaulted on its debt (for the second time in the past 13 years), and new data out of Washington showed that wages were finally on the way up (a caution flag for higher interest rates). The blue chips lost 317 points on July 31 (the Dow’s worst day since February 3) while the S&P 500 sank 39 points. The S&P lost 1.51% in an eventful month in which the Fed set an exit plan for QE3, a pair of geopolitical events troubled global markets, and U.S. economic indicators looked pretty good even as earnings were mediocre.^1,2

Key index performance is shown in the table below.

DOMESTIC ECONOMIC HEALTH
July’s Conference Board consumer confidence index came in at 90.9, a major leap from the (upwardly revised) June reading of 86.4. The University of Michigan’s consumer sentiment index, on the other hand, only reached 81.8 (0.7 points beneath the forecast of economists polled by Briefing.com). Consumer spending and incomes were both up 0.4% in June, and retail sales advanced another 0.2% in that month, with the Commerce Department revising May’s gain north to 0.5%.^3,4

As for employment, the Labor Department noted a sixth consecutive month of job creation above the 200,000 level – something that hadn’t occurred since 1997. Employers added 209,000 non-farm jobs in July, 47,000 in the professional & business services category. Unemployment crept up to 6.2% and underemployment (the U-6 rate) ticked up to 12.2% last month, but that was a consequence of more participants in the labor market.⁵

On the factory front, the Institute for Supply Management’s July manufacturing PMI read 57.1, up 1.8 points from June. U.S. industrial output had risen 0.2% in June, a Federal Reserve report noted. Buoyed by demand for aircraft, durable goods orders advanced 0.7% in June after a 1.0% retreat in May.^3,4,6

Annualized consumer inflation remained at 2.1% in June, even with a 0.3% monthly rise in the Consumer Price Index. (Yearly inflation was only at 1.1% in February.) Wholesale prices were up 1.9% in 12 months as of June, with the Producer Price Index showing a monthly gain of 0.4%. At month’s end, Wall Street noticed that the Bureau of Labor Statistics employment cost index rose 0.7% in Q2, its largest quarterly jump since 2008. Employment costs include wages, and this signaled wage growth at last. Investors fretted that the rising indicator might offer further grounds for hiking interest rates sooner than anticipated.^7,8

On July 9, the Fed solidified its endgame for QE3: reductions to monetary stimulus would continue as scheduled, concluding with a last $15 billion cut to zero at the October Federal Open Market Committee meeting. The economy was certainly over the winter doldrums: in the federal government’s initial estimate, Q2 brought 4.0% growth. The abysmal first quarter number was revised again: Q1 2014 GDP now goes in the books at -2.1% rather than -2.9%.^3,9

GLOBAL ECONOMIC HEALTH
In 2001, Wall Street hedge fund managers bought inexpensive debt from Argentina only to see that nation stop the bond payments and record the worst sovereign default in history. As July ended, Argentina stared into the maw of a second default related to the first. U.S. district courts were blocking payments to the nation’s other bondholders until Argentina finally paid interest on the debt payments it had owed the American hedge funds for 13 years. The crisis triggered a major global selloff, but that wasn’t the only anxiety putting pressure on stock market indices in July.¹⁰

After the downing of Malaysia Airlines Flight 17 in Ukraine at the apparent hands of Russian separatists, investors worried that the U.S. and eurozone would tighten economic sanctions on Russia. Israel launched a ground offensive into Gaza in response to Hamas missile attacks, and attempts at cease fires were short-lived. In mid-month, the parent firm of major Portuguese lender Banco Espirito Santo failed to make payments on commercial paper – and the bank still appeared shaky as July ended.^1,11

China offered better news. In July, its official PMI rose 0.7 points to a 26-month peak of 51.7. China’s GDP was 7.4% for the first half of 2014, but its government still predicted its economy reaching the 7.5% target for the year. Markit’s eurozone PMI topped the Reuters forecast of 52.8 for July, reaching a 3-month peak of 54.0. Factory sectors in France and Germany were heading in opposite directions – France’s Markit PMI was at 49.4 in July, Germany’s at 55.9. Markit projections showed eurozone GDP growing at about 0.4% per quarter.^12,13

WORLD MARKETS
For the second month in a row, emerging market indices largely outpaced benchmarks in Europe and the U.S. Witness these July performances: Hang Seng, +6.75%; Kospi, +3.69%; Nikkei 225, +3.03%; Sensex, +1.89%; Jakarta Composite, +4.31%; Bovespa, +5.01%; IPC All-Share, +2.53%; Merval, +3.81%; Shanghai Composite, +7.48%; ASX 200, +4.40%; MSCI Emerging Markets, +1.43%; Asia Dow, +1.59%. (The Dow Jones Americas index did pull back 1.71%).^2,14

Major European indices were mostly in the red in July. Losses came to the DAX (4.33%), the CAC 40 (4.00%), the RTS (10.74%), the FTSE 100 (0.21%), the Europe Dow (4.05%) and the STOXX 600 (1.72%). To round out the scorecard, the MSCI World Index fell 1.67% in July, the Global Dow 1.02%.^2,14

COMMODITIES MARKETS

In the big picture, futures struggled. Energy futures certainly didn’t have a good month: July brought losses of 14.04% for natural gas, 9.16% for unleaded gasoline, 2.68% for heating oil and 7.22% for oil, with NYMEX crude ending the month at $98.17. Some marquee crops descended, too: cotton went -15.39% last month, soybeans -12.54%, wheat -5.97%, sugar -0.99% and corn -15.57%. Cocoa and coffee proved exceptions; the former gained 2.13% and the latter jumped 13.49%.¹⁵

How did key metals do? Not too well. Copper futures rose 1.00% last month, but July saw COMEX gold lose 3.43%, silver 2.76% and platinum 1.57%. At the close on July 31, COMEX gold was valued at $1,281.30 an ounce. The U.S. Dollar Index gained 2.11% for July.^15,16

REAL ESTATE
Housing indicators presented a mixed bag as the data stream went from the prime home buying season of spring into summer. Existing home sales, according to the National Association of Realtors, rose 5.3% in June. That increase sent the yearly sales pace up to 5.04 million; October was the last month in which it was that high. New home sales plummeted 8.1% for June, and the Census Bureau noted 5.8 months of new home inventory on the market – the most since October 2011. Pending home sales were down 1.1% for June, NAR noted, a sea change from the 6.0% gain noticed in May.^3,17

As for yearly home price gains, there was a major slip for the S&P/Case-Shiller index in May – the annualized overall price gain across 20 metro markets was 9.3%, down markedly from 10.8% in the April edition. The Census Bureau found a 5.3% annualized increase in new home prices. Building permits for new construction were down 4.2% for June, and housing starts down 9.3% in that month.^3,7,17

Home loans? On July 31, Freddie Mac published the following average interest rates in its Primary Mortgage Market Survey: 30-year FRM, 4.12%; 15-year FRM, 3.23%; 5/1-year ARM, 3.01%; 1-year ARM, 2.38%. Here were the average rates on June 26: 30-year FRM, 4.14%; 15-year FRM, 3.22%; 5/1-year ARM, 2.98%; 1-year ARM, 2.40%.¹⁸

LOOKING BACK…LOOKING FORWARD
At the close on July 31, the Dow settled at 16,563.30, the S&P at 1,930.67, the Nasdaq at 4,369.77 and the Russell 2000 at 1,120.07. Small caps also took a beating in July, with the RUT diving 6.11%. The jump in the CBOE VIX exceeded 30% in the last trading week of the month, which left the fear index with a July gain of 46.50%. The VIX ended July at 16.95.^2,21

After the fall stocks took at the end of last month, analysts are again wondering if a correction is near. (For the record, the July 31 selloff left the S&P 500 just 3.1% down from its record high.) If a correction is coming – and Argentina, Russia and Portugal aren’t the only possible worries that might unnerve Wall Street – there is always the silver lining of being able to pick up quality shares for less, an opportunity some investors have awaited. There is certainly more to worry about than there was three months ago. Global investors do take many cues from the U.S., however, and our hiring and our GDP look very, very good right now. How much attention will the (presumably positive) indicators from America command over the next several weeks? Markets may be more volatile this month than we’ve been accustomed to during a mostly placid 2014.²¹

UPCOMING ECONOMIC RELEASES: The roll call of releases for the rest of August: June wholesale inventories (8/8), June business inventories and July retail sales (8/13), July’s PPI and July industrial output and the University of Michigan’s initial August consumer sentiment index (8/15), the July CPI plus July housing starts and building permits (8/19), the minutes of the July Fed policy meeting (8/20), July existing home sales and the Conference Board’s July index of leading indicators (8/21), July new home sales (8/25), the Conference Board’s August consumer confidence index, July durable goods orders and June’s Case-Shiller home price index (8/26), the federal government’s second reading of Q2 GDP and NAR’s July pending home sales report (8/28), and then July personal spending and the final University of Michigan August consumer sentiment index (8/29).

To Your Prosperity,

Kevin Kroskey, CFP®, MBA

This article adapted with permission from MarketingLibrary.net.
Citations.
1 - blogs.marketwatch.com/thetell/2014/07/31/stock-market-live-blog-selling-as-european-argentine-worries-weigh-whole-foods-falls/ [7/31/14]
2 - online.wsj.com/mdc/public/page/2_3023-monthly_gblstkidx.html [7/31/14]
3 - biz.yahoo.com/c/ec/201431.html [8/4/14]
4 - briefing.com/investor/calendars/economic/2014/07/14-18 [7/18/14]
5 - marketwatch.com/story/us-adds-209000-jobs-in-july-to-keep-hot-streak-intact-2014-08-01 [8/1/14]
6 - latimes.com/business/la-fi-durable-goods-manufacturing-economy-20140725-story.html [7/25/14]
7 - investing.com/economic-calendar/ [7/25/14]
8 - marketwatch.com/story/wages-finally-rising-which-could-force-fed-to-hike-2014-07-31 [7/31/14]
9 - marketwatch.com/story/fed-plans-to-end-bond-purchases-in-october-2014-07-09 [7/9/14]
10 - americasmarkets.usatoday.com/2014/07/31/5-things-to-know-about-argentine-debt-crisis/ [7/31/14]
11 - money.msn.com/business-news/article.aspx?feed=BLOOM&date=20140711&id=17768873 [7/11/14]
12 - usa.chinadaily.com.cn/epaper/2014-08/04/content_18244118.htm13 [8/4/14]
13 - tinyurl.com/kj9dxa3 [7/24/14]
14 - mscibarra.com/products/indices/international_equity_indices/gimi/stdindex/performance.html [7/31/14]
15 - money.cnn.com/data/commodities/ [7/31/14]
16 - online.wsj.com/mdc/public/npage/2_3050.html?mod=mdc_curr_dtabnk&symb=DXY [8/4/14]
17 - cbsnews.com/news/new-home-sales-plunge-8-1-percent/ [7/24/14]
18 - freddiemac.com/pmms/archive.html [8/1/14]
19 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=7%2F31%2F13&x=0&y=0 [7/31/14]
19 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=7%2F31%2F13&x=0&y=0 [7/31/14]
19 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=7%2F31%2F13&x=0&y=0 [7/31/14]
19 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=7%2F30%2F04&x=0&y=0 [7/31/14]
19 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=7%2F30%2F04&x=0&y=0 [7/31/14]
19 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=7%2F30%2F04&x=0&y=0 [7/31/14]
20 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [8/4/14]
21 - money.cnn.com/2014/08/02/investing/stock-market-lookahead/ [8/2/14]

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/