The Markets:

The uncertain sentiment in June has been replaced by a new wave of bullish sentiment that carried the U.S. stock indices and commodity prices higher last week, with interest rates falling as well (bond prices rose). (MarketWatch data).

What inspired last week’s advance in stocks, bonds, and commodities? Much of the credit goes to Fed Chairman Ben Bernanke, who offered soothing comments during a Q&A session that followed a speech about the history of the Federal Reserve (Fed website, Bloomberg News – video of the event).

In response to a question, Bernanke took on a more dovish tone, highlighting the negatives in the economy and telling his audience, “A highly accommodative monetary policy for the foreseeable future is what’s needed.” Notably missing was any talk of reducing bond buys.

In other words, he took more of a glass is half empty approach regarding the economy versus last month’s glass is half full approach (Bernanke press conference June 19). In addition, he added, “If financial conditions were to tighten to the extent they jeopardize the achievement of our inflation and employment objectives, we’d have to push back against that.”

That second comment received less play in the financial press, but suggested Bernanke may be growing a bit edgy over the recent backup in bond yields.  Did he really attempt to telegraph a different message? Well, that’s debatable. On the one hand, he didn’t add much new, underscoring policy decisions are dependent on the strength of the economic data. Yet his overall message was less hawkish than what we had heard just three weeks prior.  The chairman’s upcoming semi-annual Monetary Report to the Congress on Wednesday and Thursday will be among the top events this week. Any clarification between earlier remarks on tapering bond buys and last week’s different tune would be welcome.

We still hold the outlook that both commodities and fixed income assets could outperform the overall stock market in general over the next 12-18 months.  Even after a disappointing second quarter, we feel our portfolios are positioned in all risk levels to benefit from this possible outcome as we look forward to the balance of 2013 and beyond.  Fundamentally, nothing has actually changed from what we have been expecting to occur since early this year.  We will continue to monitor the situation and keep you posted.

Second Quarter Corporate earnings season kicks into high gear

Expectations for the upcoming earnings season have diminished considerably since the quarter began. Currently, Thomson Reuters expects April – June profits of S&P 500 companies to grow just 2.4% versus one year ago. That’s down from its estimate of 3.0% on July 1 and 6.1% on April 1.

The question that is invariably asked – how can corporate profits be setting records when the economy is far from firing on all cylinders?  For starters a number of firms in the S&P 500 Index gradually buy back their stock so earnings are spread over fewer shares. In Q1 buybacks totaled nearly $100 billion (S&P Dow Jones Indices). Relatively speaking, it’s not much given a market value of $13.9 trillion, but it helps at the margin.

More importantly, the economy has put some distance between itself and the trough hit during the depths of the recession, and that has aided sales. And the uncertainty that permeates all levels of corporate decision-making has helped keep a lid on hiring and has dampened business spending.

Recently, companies have managed expectations by offering unusually pessimistic outlooks, i.e., under promise and over deliver. We’ll have a better idea in a couple of weeks if that scenario plays out again.

We hope you all are enjoying your summer!  We truly appreciate the privilege to serve each 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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