Highlights of this Week’s Update
- The major U.S. stock indices gained ground in a shortened trading week while interest rates rose.
- The jobs report helped push stocks higher, but was still mixed when dissecting the details.
- We could see interest rates move higher over the summer, but then expect them to fall again later in the year.
- Our outlook has not changed and we still remain underweight equities for all risk levels and see portfolios perform well so far in 2014.
READ ON FOR MORE DETAILS……………………………………………………………
Key indices rose for the short trading week heading into the Independence Day holiday. The granddaddy of all market averages, the Dow Jones Industrials, closed 1.3% higher for the 3 ½ day trading week, while the broad-based S&P 500 Index, which measures the collective value of the larger companies, also gained 1.3% for the week. (MarketWatch).
Interest rates rose slightly, with the yield on the 10 year U.S. Treasury ending at 2.65%, up from 2.54% for the previous week’s close. (U.S. Treasury) Mortgage rates also rose, with the average current rate for a 30 year fixed mortgage at 4.29% and the 15 year rate is now at 3.28%. (Bankrate.com)
There were a couple of catalysts to last week’s rally. First, some of the advance came as new institutional cash flowed into stocks on the first day of the quarter. Second, and more importantly, June’s labor report suggested the economy continues to recover from the damage caused by winter. On Thursday, the Bureau of Labor Statistics reported that nonfarm payroll rose by an impressive 288,000 in June, the fifth consecutive monthly gain in excess of 200,000.
Despite the favorable report, there were a few caveats. The Labor Force Participation Rate held at 62.8%, the lowest since the late 1970s (BLS) and we saw a jump in part-time workers who would have preferred full-time work (BLS). The problem is still that the “real” unemployment rate is in the 12% range if you take into account the labor force that has simply given up on looking for a job.
Last week the forecasting firm Macroeconomic Advisors slashed its Q2 Gross Domestic Product (GDP estimate by 0.6 percentage points to 2.7% (Wall Street Journal). If the forecast holds, the economy will have stalled in the first half of the year (GDP shrank 2.9% in Q1 per the BEA). A note of caution is in order. Early estimates for Q1 GDP came in at around +1% (Bloomberg), far too optimistic. There is still plenty of data and more complete revisions to sift through before we get a clear picture of Q2 GDP.
Not too hot, not too cold (for now)
From strictly a stock market perspective, the overall employment report signaled the economy is growing at a decent clip – a plus for corporate profits. We shall see how the second quarter fared with corporate earnings announcements that will take place over the next several weeks. Yet, June’s gain wasn’t so strong that it might signal the Fed could move more quickly on the interest rate front. As always, the future remains a guessing game with many opinions in all directions.
We continue to be pleased with the overall results for portfolios this year relative to risk level. We have remained underweighted in stock exposure this year, but other asset classes have performed well and have helped stabilize and boost portfolio values overall. We anticipate interest rates could move higher over the summer months, but if they do, we would expect them to fall back again later this year. Earlier in the year we reduced the average maturity of our fixed income/bond fund holdings, and this should help stabilize prices for this sector in the weeks ahead.
We hope all of you had a great July 4th Holiday and were able to spend some extra time with family and friends in celebrating the freedoms we can still enjoy. Please be sure to set up your “half-time” 2104 review if you have not already done so. Call us today for either a phone or in-person appointment.
Your TEAM at F.I.G. Financial Advisory Services, Inc.
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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.