Highlights of the Quarterly Review and Update:
- Call today to schedule your personal mid-year review and update your long term planning.
- S. stock indices close out the quarter down slightly and are basically flat for 2015.
- Interest rates rise during the quarter along with mortgage rates.
- S. economic numbers gradually improve.
- Greece in the headlines again and uncertainty remains.
- Voters in Greece reject the terms of their creditors today.
READ ON FOR MORE DETAILS……………………………………………
Mid-Year Review and MyWealth System
As we start the second half of 2015, we encourage all of you to call and schedule your mid-year review and also get set up on our new MyWealth financial management/planning system if you have not already done so. This is a great time to review your long term goals, assess your current situation, and implement your personal plan. Call us today to set up a time, either in person or by phone, to set up a personal review time that best fits your schedule.
The Markets:
The last couple of months in the market have been some of the dullest in years. The S&P 500 Index has failed to rise or fall by over 1% for nine-straight weeks (MarketWatch data). It’s the longest streak in 21 years, according to Business Insider, when the S&P failed to rise or fall by 1% for 12 weeks. Additionally, the S&P 500 Index hasn’t posted a daily gain or loss of 2% or more for 126 days, the longest run since February 2007, through June 27th, according to Bloomberg.
For the second quarter, the Dow gave up just .88%, and for the first half of the year was down 1.14%. The Standard & Poor’s 500 stock index was off .23% for the three months ending June 30th, and produced a gain of just .20% for the first six months of 2015. (MarketWatch)
The lack of volatility, either to the upside or the downside, signals investors have been downplaying everything from the Greek debt crisis, rising chatter of a Fed rate hike or hikes later in the year, and growing signs the U.S. economy is exiting winter weakness and accelerating as we enter summer.
Interest rates rose last quarter, pushing the yield on the 10 year U.S. Treasury to 2.35% compared with 2.17% to start the year. (U.S Treasury) Higher yields make for lower bond prices. The current rates for a 30 year fixed mortgage range from 4.14% to 4.375% and 15 year fixed rates are now 3.375-3.625%. (Bankrate.com)
Oil prices rose during the second quarter, with the price of West Texas Intermediate Crude jumping $7.76 per barrel to end June at $58.47. This compares with $53.27 per barrel at the first of the year. (CNBC)
The Economy
The U.S. economy appears to be regaining some of the momentum it lost at the end of last year and the early part of 2015. Consumer spending makes up nearly 70% of U.S. Gross Domestic Product (GDP), which is the broadest measure of a country’s economic output.
Figure 1 highlights “real” consumer spending, or spending adjusted for inflation. In other words, a rise in prices can mask economic weakness simply because overall spending is up but volume is flat. Real spending adjusts for any changes in price. Following relative weakness in December, January and February, consumers re-engaged beginning in March. April was flat and economic activity always has some bumpiness, but taken together, the last three months have been more encouraging.
Meanwhile, the housing market is showing renewed signs of life – see Figure 2. New home sales in May reached the highest level in 7 years, and existing home sales are approaching the best level in 8 years.
What’s happening in the labor market? Though wage growth remains stagnant and some job indicators have yet to fully recover from the Great Recession, the Bureau of Labor Statistics reported that May nonfarm payrolls jumped a better-than-expected 280,000 in June (Bloomberg).
Furthermore, layoffs are down, as weekly first-time claims for unemployment insurance have held below the psychologically important level of 300,000 for 16-straight weeks. It’s the longest run since early 2000 (St. Louis Federal Reserve).
These all add up to an economy that is expanding at a modest pace, which is a plus for corporate profits. And it has Fed officials discussing a rate hike, or hikes, later in 2015.
Greece in the Headlines (Again)
Without a redux of the last 5 years, Greece elected a far-leftist party in January, which brought the current prime minister, Alexis Tsipras, to power. Tsipras had promised to end the tradeoff of austerity (tax hikes and budget cuts) for aid.
It probably shouldn’t be a surprise the Greek population turned to a charismatic politician that promised to lift the burdens seemingly imposed on them after its economy contracted by a jaw-dropping 26% since 2008 – see Figure 3. By way of comparison, the U.S. GDP shrank nearly 5% from peak to trough during the Great Recession (U.S. Bureau of Economic Analysis).
In a surprise move, Tsipras announced he will hold a July 5 referendum on creditor demands. The logistics of such a vote, from the wording of the referendum to printing and distributing ballots are daunting.
With the current bailout agreement having expired, the European Central Bank said it will no longer provide the necessary liquidity to support steep withdrawals from banks by Greek citizens. This forced Greece to announce a banking holiday through at least today, July 5 (Wall Street Journal). Banks are closed and withdrawals of 60 euros per day (about $66) are allowed via ATMs.
Unlike the Greek crisis of 2010 and 2011, the private sector holds very little in the way of Greek debt (MarketWatch, JP Morgan). Eurozone banks hold about $6 billion. Therefore, it is less likely a Greek default would spread across Europe and roil credit markets. Skeptics would argue we may enter uncharted waters, raising the possibility of something more serious.
While about $350 billion of Greek debt is at risk, only around $40 billion resides in commercial banks, with $14 billion owed to U.S. banks (Guggenheim Investments, MarketWatch). That’s a relatively small amount when you look at the U.S. or global banking system. Still, what’s not known is whether any large bank or hedge fund has too much exposure to Greece. While no one can be sure how this may play out, the U.S. economy is much stronger than it was when Europe was on the brink in 2011, and firewalls that are in place have been designed to prevent or limit any contagion.
Greece Update:
The people of Greece overwhelmingly voted to reject the terms of its creditors today, adding more uncertainty for at least the short term, to the global financial markets in the coming week. This doesn’t mean some type of agreement won’t eventually be reached between Greece and its creditors, but this keeps the long term outcome unknown at this point in time. Ultimately, this situation will be resolved, whether Greece and its creditors can come to some agreement, or Greece leaves the European Union and goes it alone. Global markets are lower in early trading in Asia as well as U.S. stock futures, which are trading about 1% lower at the time this is being written.. The yield on the 10 year U.S. Treasury is trading lower (prices higher) as well. (CNBC) We feel a good amount of this situation has probably been factored into the markets for the most part. We will keep you posted.
We hope you and your families had a great July 4th Holiday and you all were able to spend some time relaxing and celebrating our Country’s 239th birthday! We appreciate the privilege to serve each and every one of you and look forward to working together in the years to come.
God Bless,
Your TEAM at F.I.G. Financial Advisory Services, Inc.
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