Highlights of this Update:
1. Special workshops to provide detailed information on both fixed annuities and long term care.
2. Test your knowledge and take the stock market quiz.
3. Stock indices rise slightly in May as volatility subsides.
4. Oil ends higher in May at $48.83 per barrel, while gold prices drop $73.55 per ounce.
5. Interest rates stay low and 30 year fixed mortgages average around 3.65%.
6. Our outlook remains positive for equities and we hope to see flat to lower rates in June.
7. Various reasons explored as to what is keeping rates low.
READ ON FOR FURTHER DETAILS…………………………………………..
Did You Know?
We have the ability to assist you in your life, disability, and long term care insurance needs. We have several outlets available to us in order to “shop” coverage for clients from several sources and companies in an effort to find the best product to meet your needs. We can also access several options for fixed and immediate annuities. In an effort to help you better understand the current marketplace and options today, we have scheduled some workshops to explain and debunk various myths surrounding fixed annuities as well as long term care insurance. The workshops will be held in our conference room, and seating is limited so reserve your seats today:
Fixed Annuities: Thursday, June 23rd at 3:00pm OR Friday, June 24th at 10:00AM
We will discuss and compare all types of fixed annuities-deferred, immediate, equity index and multi-year guarantee-and the pros/cons and differences of each as well as what to look for and what to avoid. See how the proper use of fixed annuities can help reduce the overall risk of a personal investment plan.
Long Term Care: Wednesday, June 29th at 10:30am OR Thursday, June 30th at 2:00pm
We will address the recent trend of companies across the country raising rates on existing policies, coverages available, and new types of products today to address the growing need and costs of long term care. This is probably one of the biggest, if not THE biggest threat to the success of our personal financial plan and long term financial security.
Call us today—844-9826 to reserve your seats and feel free to bring a guest to these informative sessions. Seating is limited, so call today!
Take the Stock Market Quiz:
1. How many stocks were on the original Dow Jones Industrial Average?
2. Where was the first U.S. stock exchange located?
3. What four companies are traded on the NASDAQ exchange but listed on the Dow Jones Industrial Average?
4. How much is a “ton of money” assuming your ton is measured in new $20 bills?
5. What is the only original stock still listed on the Dow Jones Industrial Average?
6. What year did the Dow Jones Industrial Average close above 1000 for the first time?
7. What company has been listed the longest on the New York Stock Exchange?
8. Has the national debt ever been fully paid off?
9. Who was the first American to make $100 million?
10. Who was the first U.S. president in office to visit the New York Stock Exchange?
Answers are at the end of this newsletter.
The major U.S. stock indices were able to eke out small gains for the month of May, with the Dow Jones Industrial Average1 up .08% and the Standard & Poor’s 5003 stock index rising 1.53%. Stocks have remained in a trading range for the past several weeks, and are basically flat since February 13, 2015 as measured by the S&P 500. (Google Finance) After 5 full months so far in 2016, the Dow is up 2.08%. (MarketWatch)
Oil prices continued to rise in May, and the price for a barrel of West Texas Intermediate Crude oil rose $2.84 closing the month at $48.835. This compares with $37.07 at the start of the year. (St. Louis Federal Reserve) Gold prices fell $73.55 per ounce ending at $1,212.106 on May 31st. (CNBC)
Overall volatility for the markets has subsided somewhat from earlier this year, and interest rates have trended lower. If interest rates can stay flat to down in the coming month, we would look for a positive second half to ensue. If rates do move lower from here, we would anticipate moving the majority of our fixed income allocations to short and ultra-short term funds to protect portfolios against potentially higher rates in the future. At present, client portfolios for all risk levels are positioned based on our generally positive outlook for equities moving forward, and we continue to search for value within individual stock issues. The markets have moved as expected over the past few months, and we will monitor and make adjustments as warranted.
It’s no secret that interest rates for highly-rated securities remain at rock bottom levels. From T-bills to FDIC-insured savings accounts, earning a respectable return on safe investments has been next to impossible. The same holds true for Treasury bonds.
The yield on the 10-year Treasury has dropped since the start of the year, closing out May at 1.84%, even as the Federal Reserve boosted its key rate late last year. The 30 year U.S. Treasury bond now yields just 2.64% at the end of last month. (U.S. Treasury) Remember, bond prices and yields move in opposite directions. The average 30 year fixed rate mortgage now stands at 3.65%. (Bankrate.com)
So what might be keeping yields on government bonds at low levels? There are several themes that are impacting rates-let’s review a few.
Economic growth and yields
In the broadest sense, slow economic growth in the U.S. and expectations that growth won’t be accelerating anytime soon are a big factor – see Figure 1.
For starters, the yield on the 10-year bond remains near its lowest level in decades.
Note the close correlation between nominal Gross Domestic Product (GDP), the largest measure of goods and services, and the yield on the 10-year bond, which signals that growth at home is a large part of the bond-yield equation.
Nominal GDP includes the change in economic output PLUS inflation. Therefore, if real GDP grew by 0.7% and inflation increased by 1%, nominal GDP would rise by about 1.7%. Taking this one more step, the blue line is simply the average change in nominal GDP over the last 12 quarters.
Note in Figure 1 that economic growth appeared to be expanding at a fast clip in the late 1970s and early 1980s. However, most of that growth was simply an illusion, i.e., slow real economic growth plus rapid inflation. Yet, that played a significant role in the surge in Treasury yields, as investors demanded a higher return to compensate for higher inflation.
Global rates enter the picture
Slow economic growth and very low inflation among the major industrials nations have encouraged central banks to open up the monetary floodgates. This includes the Bank of Japan and the European Central Bank. Consequently, government bond yields in major countries, including those in Japan and several more economically stable countries in Europe, have fallen well below what we have in the U.S. (Bloomberg).
Low global rates have encouraged some foreign investors to look to countries like the U.S., which sport relatively higher yields. Given that money can easily move across borders today, higher yields at home are likely attracting foreign capital into U.S. bonds, boosting Treasury prices.
The Fed effect
The Federal Reserve exerts a significant amount of control over short-term rates such as the fed funds rate and T-bills, but it can only hope to influence longer-term bonds. The Fed has kept rates at low levels, hoping low loan rates will stimulate borrowing and spending by businesses and consumers, which in turn would drive economic activity and hiring. Clearly, there are limits to what the Fed can do to boost U.S. economic growth.
The Fed did hike the fed funds rate last December by 0.25% to a range of 0.25-0.50%, the first increase in almost 10 years. But the Fed has explicitly been saying that any future rates hikes are expected to come at a gradual pace.
Official measures of inflation, which include the Consumer Price Index and the lesser known PCE Price Index (Personal Consumption Expenditures), continue to run at low levels. Given that inflation and inflation expectations remain low, investors are not demanding a premium to hold bonds. Put another way, low inflation is one more factor that keeps a lid on bond yields.
Where to from here
There’s not much to suggest we’ll see a significant rise in rates in the near term, but any projections that try to forecast where bond yields might be headed are best avoided, as no one has a crystal ball. Few foresaw how long rates would stay low and few have the ability to accurately pinpoint rates in the future. At some point, the bottom in rates will be called and a rising rate environment will ensue, but the accurate call will be in hindsight.
We appreciate the privilege to be of service to each and everyone one of you and look forward to working with you in the years to come. As always, don’t hesitate to call if we can ever be of further service.
Your TEAM at F.I.G. Financial Advisory Services, Inc.
Answers to the Stock Market Quiz:
1. Answer: 12
2. Answer: Philadelphia in 1790
3. Answer: Apple, Cisco, Intel, and Microsoft
4. Answer: $19.6 million
5. Answer: General Electric
6. Answer: 1972
7. Answer: Consolidated Edison
8. Answer: Only once, in 1835-1836 under President Andrew Jackson. This was the only time any modern nation has eliminated its national debt.
9. Answer: Al Capone
10. Answer: Ronald Reagan, 1985
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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; Prices can and do vary; past performance does not guarantee future results.