Highlights of This Month’s Review:
- U.S. stock markets continue to run sideways and basically flat for the year.
- We continue to focus our stock/equity exposure on individual company names and have seen the portfolios perform well so far in 2014 relative to risk.
- The Fed pulls back another $10 billion in bond buys but interest rates decline.
- Economic news remains mixed and a very disappointing 1st quarter for the U.S. economy.
Read on for further details………………………………………………………………………………..
The U.S. equity indices continued their see-saw movement in April, with the Dow Jones Industrial Average ending up less than 1% for the month, and basically flat for the year. The broader based S&P 500 stock index was flat in April as well, and was up approximately 1.93% so far in 2014 as of April 30th. (Google Finance) We’re now four months into 2014 and stocks been moving sideways. In the meantime, bonds, which were expected to post further losses (bond prices and yields move in opposite directions), have mostly advanced The yield on the 10 year U.S. Treasury is now at 2.61%, down from around 3% at the end of 2013. (Bloomberg).
The rate of a 30 year fixed rate mortgage stands at about 4.26%, down from around 4.75% last July 5th, and the 15 year rate for a fixed mortgage is now at 3.35%. (Bankrate.com)
Our portfolios have fared well so far this year relative to risk, with the more conservative assets such as the fixed income/bond portion within our various portfolio models providing above average overall returns so far in 2014. This is primarily due to the decrease in interest rates since the end of 2013. The alternative allocation in all risk levels has also added to the 2014 year-to-date returns. We have focused the equity/stock portion of the portfolios for all risk levels on individual company names, and have opted to avoid stock mutual funds in general at this time. Our opinion is still that the stock market in general is still overvalued, and we would expect either a sideways market to continue for some time to allow earnings to catch up with prices, or a decrease in stock prices to get valuations back in line.
Back in September 2012, the Federal Reserve announced its third round of bond buys, using its ability to create an unlimited amount of money to snap up longer-term Treasury bonds and mortgage-backed securities. Designed to put downward pressure on interest rates and stimulate economic growth and hiring (bond prices and bond yields move in opposite directions), the flood of money from the Fed has generally been considered a powerful support for equities.
Throughout 2013, the Fed bought $85 billion in longer-term Treasuries and mortgage-backed securities each month. Near the end of December, the Fed reduced the monthly bond buys by $10 billion and has continued to trim back at the same pace at each subsequent meeting. We’re now at $45 billion in monthly purchases following the April 30th meeting.
The Fed’s recent guidance on rates has been unusually vague…and for a reason. Fed Chief Janet Yellen noted she and her colleagues at the Fed expect “moderate growth,” but “the path of the economy is uncertain.”
Is the fed funds rate important? You bet it is! Note in the chart below how closely the yield on the 3-month Treasury bill mirrors the fed funds rate. And the data go back nearly 60 years.
The first quarter, 2014 Gross Domestic Product (GDP), which is the broadest measure of economic activity came in at a very meager 0.1%. The expectation among most economists was 1.1%. Some blamed the harsh winter weather on the poor results, but time will tell. The economic news has been mixed at best, with some areas showing promising signs for improvement, while others still paint a very weak picture moving forward.
Financial markets are forward-looking, trying to anticipate changes in the economy, corporate profits, interest rates, etc. We are about to enter May, but the GDP data are old – January thru March. It’s a rearview-mirror look (some might even say a “cracked rearview mirror”), but it doesn’t tell us much about the future.
Russia pays a price as it upsets the global applecart
Once again, geopolitical tensions are rising between Russia and the West, with Ukraine in the unenviable position of being stuck in the middle. The situation has recently grown increasingly fluid, but after some disagreement last week (Wall Street Journal), it appears the U.S. and its allies have agreed to more punitive sanctions against Russia (The Guardian). Yet, Russian territorial ambitions have not come without a cost. Cash flows out of the country have intensified, prompting Standard & Poor’s to lower Russia’s sovereign debt rating to ‘BBB-,’ or one notch above junk status (Wall Street Journal).
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1 The Dow Jones Industrials Average is an unmanaged index of 30 major companies which cannot be invested into directly. Past performance does not guarantee future results.
3 The S&P 500 Index is an unmanaged index of 500 larger companies which cannot be invested into directly. Past performance does not guarantee future results.