2nd Quarter, 2014 Review and Outlook

Highlights of This Quarter’s Update:

1. Remember the true meaning of the July 4^th Holiday and share it with family and friends.
2. First half of 2014 served us well, with higher stock, bond, and commodity prices.
3. We remain cautious with portfolio allocations and still look for a stock correction at any time.

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

4^th of July Holiday

As we all gather to celebrate the July 4^th Holiday this year with friends and family, let’s not forget why we really take this time and recognize the beginnings of the freedoms we all enjoy.  It’s quite amazing how many young Americans, as well as older, really don’t appreciate or realize the true origin of the July 4^th Holiday.  It’s not just about fireworks and cookouts.  As we approach the 238^th anniversary of the signing of the Declaration of Independence, let’s take some time to reflect on the real meaning of the upcoming Holiday.  Here are two simple questions worth considering and sharing with family and friends this year:

Why is America different from all other countries?

“Because in 1776, all countries were based on nationality, ethnicity, religion, or geography.  But America was created on the basis of a set of ideas.  That is still true today.”

What are those ideas?

“Three ideas summarize what America is all about.  They are engraved on every American coin.  They are:  “LIBERTY”, “IN GOD WE TRUST”, and “E PLURIBUS UNUM” (out of many, one).

Have a safe and blessed Holiday weekend!

The Markets:

The major U.S. stock indices ended the first half of 2014 on a positive, albeit mixed, note.  The Dow Jones Industrial Average ended with an increase of just 1.5% after the first six months of this year, while the Standard & Poor’s 500 stock index produced gains of 6.1%.  Interest rates also remained lower than where they started the year, with the yield on the 10 year U.S. Treasury ending at 2.53%.  Lower interest rates meant higher bond prices in general.  Commodities, gold, and silver also gained for the first half, and oil rose to $105.51 per barrel as of June 30^th compared with $98.42 on December 31, 2013.  (MarketWatch, U.S. Treasury, CNBC)

Mortgage rates also dropped, with the average 30 year fixed rate mortgage sitting at 4.15% and the 15 year fixed mortgage at 3.22% today, July 1^st.  (Bankrate.com)

The global central banks are currently helping to power the rally in financial assets and keeping interest rates low. Right now, the U.S. Fed has said its current plan is to keep interest rates at rock bottom levels for a considerable period of time (FOMC statement). Even after the first increase, rate hikes are expected to be gradual.

The tapering of the Fed’s bond buying program played a role in hampering stocks earlier in the year, but in June the European Central Bank (ECB) offered up a modest menu of unconventional monetary measures and added fuel to the mix for U.S. stocks. The ECB cut its key lending rate from 0.25% to 0.15%, the lowest on record. More importantly, it reduced its deposit rate, or the rate banks earn when they park overnight reserves at the ECB from 0.0% to a -0.10%, the first time a major global central bank has ever had a negative rate. For the most part, the cuts are modest and are more psychological in nature.

Three items to keep an eye on

1. Any comments from European Central bankers that hint at more specific plans for a Federal Reserve style bond-buying program would be of interest. Few expect any immediate action, but a continued deceleration in an already low rate of inflation could spark more aggressive measures later in the year.
2. The geopolitical problems in Iraq are unlikely to recede, but markets have a way of adjusting to a new reality when it becomes clear the U.S. economy won’t be affected. Or the headlines simply fade and the Street returns to its focus on economic growth and corporate profits. Nonetheless, it’s a potential headwind that could create volatility in the weeks and months to come.
3. Elsewhere, the U.S. economy shrank at an annualized rate of 2.9% in the first quarter, catching nearly all economists by surprise. Most data have suggested the economy may be bouncing back, but continued sluggishness can’t be completely dismissed. The Fed downgraded its economic outlook for 2014 at its June meeting, but has maintained an optimistic tone for 2015 and 2016. Continued progress on the economic front will likely hasten the day when the Federal Reserve begins to boost interest rates. A number of Fed officials have suggested the first rate hike could come in the second half of 2015. If economic progress stalls, the ever-elusive rate hike would likely be delayed again.

Our Outlook

Portfolios across all risk levels ended the first half of 2014 with above average returns in general relative to their risk categories.  This was accomplished while remaining underweighted in stocks/equities during the first six months of the year.  As stock prices continue to rise, we feel the current risk also increases for some type of correction for stock prices at any time.  Interest rates have fallen this year as we had been expecting since the second half of last year, helping push fixed income/bond prices higher. Commodity prices have risen as well and all these factors have benefitted portfolio values for all risk levels so far in 2014.  We continue to monitor the situation on a regular basis and can make changes as warranted.  Be sure to call and schedule your 2014 “Half-Time” review if you have not already done so.

We truly hope you and yours have a very safe and happy July 4^th.  Remember, the financial markets will close at 12:00 noon central time on July 3^rd, and be closed on Friday, July 4^th.  Our office will close as well.

God Bless,

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.

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