Highlights of this Update:
- Stocks start out the year lower, with the major U.S. stock indices producing negative returns in January.
- Interest rates continue lower with 30 year U.S. Treasury yields hitting new low.
- Mortgage rates fall-It may be a good time to refinance.
- Global uncertainties bring continued market volatility.
- Oil prices continue to fall for the month.
- The U.S. dollar soars.
- We have made several changes to our overall portfolio allocations across all risk levels in an effort to reduce volatility moving forward.
- Book review coming the end of February: “David and Goliath” by Malcolm Gladwell
READ ON FOR FURTHER DETAILS…………………………………………………..
The Markets:
A Slow Start for Stocks, Treasuries Shine
The start to the New Year hasn’t been very generous to shareholders. The Dow Jones Industrials and the S&P 500 Index both ended January on a negative note. The Dow was down 3.69% and S&P 500 off 3.10% for the first month of 2015. But the uncertainty that stymied stocks was a boon to bonds. (MarketWatch)
The yield for 30 year U.S Treasuries hit a new low, ending January at just 2.25%. Lower interest rates overall also led to lower mortgage rates. The rate for a 30 year fixed mortgage was as low as 3.625%, and 2.75% for a 15 year fixed mortgage. (U.S. Treasury, Bankrate.com)
The themes that dominated the headlines included the surging dollar, worries about the slow growth outside the U.S., global central banks that are implementing more aggressive monetary policies, and of course, the fall in oil prices. West Texas Intermediate Crude oil ended the month at $47.85 per barrel, down another $5.42 from the December 31st close. (CNBC)
Those themes added volatility during the month, with the Dow Jones Industrials rising or falling by more than 100 points in 14 of the 19 sessions (St. Louis Federal Reserve). Nine of the 14 days saw losses, while the remaining five were positive.
Even with the increased global uncertainty, the outlook for the U.S. economy has been brighter than what we’re seeing in Europe and Japan. China is growing faster than the U.S., at least according the official data, but its growth rate continues to moderate. Notably, the International Monetary Fund recently upgraded its forecast for U.S. economic growth by 0.5 percentage points to 3.5%. But elsewhere, downward revisions were the norm.
The world’s major central banks have responded to slow growth, and in some cases deflationary fears, in an increasingly aggressive fashion. The European Central Bank (ECB) announced it will begin buying 60 billion euros (about $68 billion) in bonds each month for the next 18 months (ECB press release), which is similar to the bond-buying program that ended last year in the U.S.
The Bank of Japan is showing no signs of tapping on the brakes with its hyper-aggressive monetary policy. Meanwhile, central banks in Canada, India, Switzerland, and Denmark surprised investors by cutting key rates last month (Wall Street Journal, various sources).
Slow global growth and easier monetary policies by central banks have been a big factor in driving bond yields to record lows in several European nations. For example, as the month came to a close, the German 10-year government bond sported a yield of just 0.30%, France stood at 0.54%, while Spain can borrow for 10 years at just 1.42% (Bloomberg). That compares with 1.68% for the U.S. 10-year Treasury
Falling yields around the world are influencing what’s happening in the U.S. bond market. Note in Figure 1 that the yield on the 30-year Treasury bond finished the month at a record low.
The ramifications of the surging dollar
The stronger dollar will help keep a lid on import inflation, a plus for U.S. consumers. As the year came to a close, the Import Price Index released by the Bureau of Labor Statistics (BLS) fell 2.5% versus the same period a year ago. Yes, falling oil prices helped, but minus out fuels, import prices were unchanged. On the flip side, exports become less competitive.
Note: the Trade-Weighted Dollar Index measures the dollar against major foreign currencies. It cannot be purchased directly. The rate can and does vary; past performance does not guarantee future results.
As fourth quarter earnings season unfolds, most U.S. companies are topping analysts’ forecasts for profits (Thomson Reuters), but we’ve witnessed several high-profile misses thanks to the surging dollar (FactSet Research, Investor Relations respective firms).
Simply put, a firm’s overseas sales may be growing in the local currency, but they are smaller when converted back into stronger dollars. On the other hand, if you are thinking about a trip overseas, the dollar is an added incentive to travel.
Our Outlook:
We still view the overall stock market as overvalued, however, with current interest rates so low we don’t expect an extended or major decline in stocks for now. We still remain underweight in stocks/equities for all risk levels, and have made some significant changes in our overall asset allocations since the end of the year based on our current outlook moving forward. We see market volatility continuing to be a factor for this year, and have made some adjustments within portfolios in an attempt to reduce overall volatility for portfolios moving forward. It would not be a surprise to see interest rates move slightly lower from here, and then possibly level out for the foreseeable future. The fixed income portion within portfolios has been adjusted to reflect shorter maturities and/or holdings that can either weather or benefit from higher interest rates at some point in the future. We will keep you advised.
Coming Book Review:
The book I am reading this coming month is “David and Goliath” by Malcolm Gladwell. I am looking forward to providing you with a general review of the book in our month-end update. It looks to be a great read and I am looking forward to both reading the book myself and reporting back to you at the end of February.
We encourage all of you to call today to schedule your review and financial planning update if you have not yet done so this year. We want to get all of you set up on our new interactive financial management/planning system, MyWealth, as soon as possible. Have a great week!
God Bless,
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.
Looming Risks Overlooked