Highlights of This Month’s Update:
- Stock markets shrugged off global turmoil and turned higher for the month after the dip in late July-early August.
- Interest rates dropped in August, while gold rose slightly.
- A European economy still in the doldrums and pressure from the conflict in Ukraine with Russia continues to weigh.
- U.S. Fed gives some insight on future direction of policy, but still unclear as to timing of any interest rate changes.
- Our outlook continues on track and we are pleased with the overall 2014 net returns for all client risk levels through August.
- Be sure to call today for reservations at our upcoming Annual Client Appreciation Event on September 18th.
READ ON FOR FURTHER DETAILS…………………………………………………………
The end-of-July slide in stocks has become a distant memory after buyers stepped back in last month, helping the S&P 500 Index gain 3.8% in August and pushed the Dow Jones Industrial Average 3.2% higher. Gold rose $0.50 per ounce while interest rates dropped. The yield on the 10 year U.S. Treasury fell to 2.35% at the end of August, and the price of a barrel of oil dropped $0.91 to end at $95.84 last Friday.
Sources: MarketWatch, U.S. Treasury, CNBC, St. Louis Federal Reserve, Energy Information Administration
High Yield Bonds
One catalyst to help push markets higher in August appears to have been action in the high-yield bond market. Note from Figure 1 that anxieties emanating from junk debt pushed yields up sharply, creating mild tremors in equities.
Note: Bonds rated ‘B’ are considered non-investment grade and highly speculative
The sharp rise in yields provided a more attractive risk-reward proposition, encouraging a flow of cash back into junk bonds, which alleviated pressure on stocks.
Let me add one more catalyst that is vying for attention: the economic problems festering in Europe and European Central Bank (ECB) talk that more aggressive monetary measures are on the horizon. Any additional initiatives that might be in the pipeline come at a time when the Fed is reducing its own monthly bond purchases.
Yes, a bond-buying program financed by freshly minted cash is controversial, and some openly fret it would not cure what ails Europe. Others argue the overly conservative ECB is behind the curve (more in a moment), as it behaves like a deer in the deflationary headlights.
Still, Europe’s problems are deep-rooted and won’t be fixed overnight. Unemployment remains at an elevated 11.5%, and its annual inflation rate has fallen to an uncomfortably low 0.3% (Eurostat).
The ECB may soon be ready to announce more aggressive measures to combat deflation. For U.S. investors, the prospect of new cash in the financial system has been a support to stocks. In addition, the threat of deflation has sent yields across Europe to record low – see Figure 2. Remember, the U.S. 10 year Treasury yield now stands around 2.4%. It seems almost incomprehensible that investors will lend cash to both Italy and the U.S. at roughly the same rate. But capital easily crosses borders, which is helping to keep a lid on yields at home.
With the grandeur of the Teton Range as a backdrop, Fed Chief Janet Yellen offered up her latest thoughts on the labor market and rate hikes at the annual Economic Symposium in Jackson Hole, Wyoming last month. Though she didn’t provide a specific interest rate timetable, there was a noticeable shift in her thinking. “With the economy getting closer to our objectives, the (Fed’s) emphasis is naturally shifting to questions about the degree of remaining slack (in the labor market), how quickly that slack is likely to be taken up, and thereby to the question of under what conditions we should begin dialing back our extraordinary accommodation (raising interest rates),” Yellen said in her speech. But she was quick to point out that measuring slack in the labor force is imprecise, and there is “no simple recipe” when it comes to setting a course for monetary policy. Her thinking is relatively straightforward. If there’s plenty of slack remaining, the Fed can hold rates low, as it hopes to speed up the economy and put people back to work.
We are pleased with the 2014 year-to-date returns for client portfolios as of the end of August, especially given each risk level. We have remained cautious on stocks/equities in general, and have continued to focus on individual company issues this year vs. stock/equity mutual funds. Our weighting for stocks in all risk levels remains below average, and we continue to be on the watch for some type of downturn in stocks overall moving forward. Over the past few months we have made some adjustments in our fixed income/bond holdings in an effort to make them less sensitive to higher interest rates moving forward.
We hope you all had a great Labor Day weekend and were able to spend some time with family and friends. Don’t forget to call today to reserve your seats at our upcoming Annual Client Event on September 18th at the Quail Creek Golf and Country Club. We look forward to seeing you there!
Your TEAM at F.I.G. Financial Advisory Services, Inc.
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.
4 New York Mercantile Exchange front-month contract; Prices can and do vary; past performance does not guarantee future results.
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