Stocks, Interest Rates Rise

Highlights of this Week’s Update:

1. Stocks end the week slightly higher after another see-saw week.
2. Interest rates rose, while rates for a 30 year fixed mortgage can still be found under 4%.
3. Fed Chief Yellen’s comments make stocks nervous, but employment numbers push stocks higher.
4. Stocks overvalued, but low interest rates could still provide upside potential.

READ ON FOR MORE DETAILS……………………………………………………….

The Markets:

Last week saw the major U.S. stock indices gyrate back and forth once again, and by Friday’s close, both the Dow Jones Industrial Average and S&P 500 were able finish the week with net gains.  The Dow rose by .93%, and is now up 2.06% so far in 2015.  The S&P 500 gained .37% bringing its year-to-date return to 2.78%.  (MarketWatch)

Oil was fairly flat, falling just .21 per barrel, closing at $59.47 compared to $53.27 per barrel on 12/31/14.  Gold prices rose, gaining $10.05 per ounce, finishing the week at $1,186.00.  (CNBC)

Interest rates rose slightly, with the yield for the 10 year U.S. Treasury moving to 2.16%, compared to 2.17% at the start of the year. (U.S. Treasury)  The rate for a 30 year fixed mortgage ranged from 3.75-4.125%.  15 year fixed mortgage rates were 3-3.5% as the week ended. (Bankrate.com, Bank SNB)

Fed Chief Yellen: Stock Valuations “Generally Quite High”

“I would highlight that equity market valuations at this point generally are quite high,” Yellen said in a conversation with Christine Lagarde, the managing director of the International Monetary Fund. The remarks were made at an event last week sponsored by the Institute for New Economic Thinking. “They are not so high when you compare the returns on equities to the returns on safe assets like bonds, which are also very low, but there are potential dangers there,” Yellen said (Wall Street Journal).

Any time the chair of the Federal Reserve makes comments about stock prices, it’s usually worth noting. Her first sentence is likely a focus of current stock prices in relation to corporate earnings. By itself, she may have an argument. But Yellen quickly qualified the statement, noting that rock bottom yields on bonds (or for that matter, money markets or T-bills) offer very little competition at the present time.

While Yellen’s credentials to lead the world’s largest central bank are impeccable, that doesn’t mean she has a crystal ball to accurately call a top in stocks.

How about former Fed Chairman Alan Greenspan’s now famous ‘irrational exuberance’ comment made in 1996 when the market was surging ahead. In a speech entitled The Challenge of Central Banking in a Democratic Society, Greenspan quipped, “But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?”

Stocks continued their run for over three years.

Last Monday, two days prior to Yellen’s talk, Warren Buffett echoed similar comments about stocks and interest rates in a televised interview on CNBC. “The market against normal interest rates is on the high side of valuation, not dangerously high, but on the high side of valuation. On the other hand, if these interest rates were to continue for 10 years, stocks would be extremely cheap right now,” he said

“We don’t try to guess which way the market is going,” he added. “We have no idea what the market is going to do next year…If these low interest rates prevail for 5 or 10 years, you’ll look back and say stocks were very cheap. If interest rates normalize, you’ll look back and say they weren’t so cheap.” That comes from one of the most successful investors over the last 50 years.

We began this year feeling that stocks were generally overvalued, but due to the low interest rate environment the chance of major stock decline was low.  That doesn’t mean there might not be a 5-10% correction at some point, but most likely a sharper or extended drop could be avoided for the near term.  We also thought we could see a sideways and more volatile stock market in 2015, and so far, that has basically been the case.  We continue to look for under or fairly valued stocks in which to invest, as well as continue to diversify our holdings in both the stock/equity and fixed income/bond categories.

The economic fundamentals, corporate profits, and interest rates will be among the biggest factors that influence equities. It’s why a longer-term approach that incorporates a carefully crafted investment plan that takes the emotion out of investing has historically been the most prudent approach for long term investment success.

We appreciate the privilege to serve each of you and don’t ever hesitate to let us know if we can be of further service at any time.  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.

⁵ New York Mercantile Exchange front-month contract; Prices can and do vary; past performance does not guarantee future results.

⁶ London Bullion Market Association; gold fixing pricing at 3 p.m. London time; Prices can and do vary; past performance does not guarantee future results.