Highlights of This Week’s Update:
- We do not feel the current situation regarding the Ebola virus will have any meaningful impact on the U.S. financial markets.
- Volatility continued again last week, but the end results were minor changes for the Dow (down just 0.9%) and S&P 500 (off 1.02%) once the week ended.
- Interest rates continued to fall, with the average 30 year fixed rate mortgage dropping under 4%, to 3.93%.
- Gold prices rose, while oil fell.
- Europe still struggles but the U.S. economy isn’t really that dependent on the Eurozone.
- Interest rates could continue to remain low for the foreseeable future.
- We don’t feel the current drop in stocks will continue long term or be extreme in nature.
READ ON FOR MORE DETAILS………………………………………………………..
We’d be remiss this week not to at least mention the current fear over the Ebola virus that is rising in the U.S. Based on research and information from reliable sources, we have come to the conclusion that much of the reaction people seem to be having appears to possibly be an overreaction at the present time. There are several good articles you can read by simply searching the internet, but you must take caution in looking for available facts, not opinion or rumor. The following link is one article we felt shed light on the situation we face with Ebola, and is one of many that may give you some additional information to consider: http://www.forbes.com/sites/dandiamond/2014/10/16/ebolas-very-contagious-ebolas-also-hard-to-catch-confused-heres-how-to-understand/
How does Ebola affect the stock market, or does it? In our opinion, the current situation has little, if any, impact on the U.S financial markets. It may have some effect on airline stocks, at least temporarily, but that is probably the extent of any direct influence on stock prices at this time.
Last week’s trading activity saw a range of emotions. There was fear on Wednesday, when the Dow Jones Industrials fell 223 points (MarketWatch) and investors flocked into the safe arms of Treasuries. Highlighting the concerns, the yield on the 10-year Treasury bond briefly traded as low as 1.87% on Wednesday morning (Wall Street Journal; bond prices and yields move in opposite directions). This compares with the previous Friday’s close of 2.31%. That’s a colossal move for the bond market!
By the time the week ended after Friday’s jump higher, the Dow Jones Industrial Average had dropped just 0.99% and the Standard & Poor’s 500 was off 1.02% for the five trading days. Gold jumped $15.25 per ounce to close at $1,234.25 and crude oil fell $2.60 per barrel to end the week at $82.92. The yield on the 10 Year U.S. Treasury finished on Friday at 2.22%. (U.S. Treasury, CNBC, Energy Information Admin.)
By Friday, the average 30 year fixed-rate mortgage had dropped to 3.93%, while the 15 year fixed rate dropped to 3.04%. (Bankrate.com)
Turning to the weakness in stocks, big liquidations from the big hedge funds likely played a role (CNBC) – both voluntary and forced margin calls. Worries about the Ebola virus are difficult to quantify, but analysts will always look for various reasons to pinpoint heavy market volatility, even if the reason is not really related to the markets.
Then there was Friday’s relief rally, with the Dow finishing up a strong 263 points (MarketWatch). The downturn in stocks encouraged some bargain-hunting. There were also dovish comments from officials at the European Central Bank (Wall Street Journal), the Bank of England (Reuters), and a surprising injection of cash into the Chinese financial system by the Central Bank of China (CNBC).
Europe’s less-than-significant role in U.S. economic affairs
European deflationary fears and the potential for slipping into its third recession since 2008 are being blamed in part for the recent selloff in U.S. stocks. Changes in sentiment can and do impact stocks at home.
Market choppiness can sometimes be unnerving, but it’s also important not to let emotions rule long-term investment decisions. So let’s step back for a moment and review overseas sales in relation to the U.S. economy.
Table 1: Major components of U.S. Gross Domestic Product (GDP)
|Personal consumption expenditures
|Govt. consumption expenditures
|Gross private domestic investment
Data Source: BEA
Note: Figures add up to more than 100 as imports detract from GDP and are not included in the table. There is also a plug figure for the change in private inventories.
Exports have grown in the last 25 years, aiding the U.S. economy and multinationals at the margin. But at 13% of total economic activity, the U.S. is not dependent on exports. Put another way, when the U.S. sneezes, the rest of the world is the one that catches a cold.
Europe is even a smaller percentage of the overall pie.
Table 2: U.S. exports to Europe
|U.S. Exports of Goods to the European Union
|U.S. Exports in Billions of Dollars
Data Source: BEA
The 2012-13 recession in the euro-zone did interrupt rising exports to Europe; however, there was not a significant decline. Moreover, the U.S. economy’s total value at the end of 2013 topped $17.0 trillion (BEA). Putting U.S. exports to Europe into perspective, it’s a small percentage of the overall U.S. economy.
Stabilizing U.S. markets
For starters, a change in the storyline could play a big role.
- Third quarter earnings season ramps up significantly this week. Strong numbers, upbeat commentary, and more sanguine forecasts from the big industrials might go a long way in alleviating fears that economic problems in Europe are washing up on our shores. In fact, we’ve already started to see some of that (Wall Street Journal, Financial Times).
- Economic data suggesting U.S. fundamentals continue to improve. Last Thursday, the Dept. of Labor reported that weekly jobless claims fell to the lowest level since April 2000 (Dept. of Labor).
- It sounds counterintuitive, but stabilization in oil prices could help. Though declining oil prices are a plus for consumers, a downturn in one risky asset can spread to other assets, including stocks. With oil near $80 per barrel, expensive techniques that have revolutionized the U.S. oil industry remain profitable, but we also get a break at the pump.
Finally, with all the media attention being focused on the big market swings, the Dow Jones Industrials and the S&P 500 Index have not dropped 10%. Last week’s decline of around 1% for the Dow and S&P 500 may have felt much worse, but the net result was minimal given the overall volatility.
The diversification within our portfolios helped offset some of the volatility last week. With less exposure to stocks/equities than normal for all risk levels, some of the positions in bond/fixed income and gold related assets helped to offset a portion of the decline in stock prices. As we stated in last week’s update, we do not view the current downturn in stocks at this time to continue on a long term basis or to be severe in nature. If this changes, we can become more defensive within our allocations. The U.S. economy at present does not appear headed towards recession, but with some global economies struggling and the challenges of current events in general, we would expect interest rates in the U.S. to remain low for the foreseeable future. We may have to get used to above average market volatility during these uncertain times, but it is important to keep focused on the longer term and to be sure to look at the facts surrounding current events and not on emotions, rumor, or simple hearsay. Please don’t hesitate to call us if you have any concerns or questions. We will keep you advised.
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.
4 New York Mercantile Exchange front-month contract; Prices can and do vary; past performance does not guarantee future results.
5 London Bullion Market Association; gold fixing pricing at 3 p.m. London time; 2013 year-end price fixing at 10:30 a.m. London time; Prices can and do vary; past performance does not guarantee future results.