Highlights of this Update:
- Call us today to schedule your personal mid-year review!
- S. stock indices continue moving higher over the past week.
- Interest rates remain low, helping keep mortgage rates down.
- Markets are moving as we had expected so far in the second half.
- Global bond yields now at negative levels in Europe and Japan.
READ ON FOR FURTHER DETAILS……………………………….
Mid-Year Reviews:
It is a great time for you to schedule your mid-year review and also update your personal long term financial plan. Our MyWealth system can provide you with the tools for your own personal financial management as well as allow us to assist in working together with in the preparation, monitoring, and updating of your own financial plan and goals. Call us to day to schedule your personal review, either in person or by phone!
The Markets:
The major U.S. Stock indices continue to rally off the “Brexit” lows with the Dow Jones Industrial Average now up 6.60% for 2016 as of today’s close. The Standard & Poor’s 500 stock index closed today at 2,166.89 and is now up 6% so far this year. (Google Finance)
Interest rates remain low, but rose slightly over the past week. The yield for the 10 Year U.S. Treasury ended today at 1.58% while the average rate for a 30 year mortgage is now 3.42%. The 15 year fixed mortgage rate ended today at 2.69%. (CNBC, Bankrate.com)
The price of West Texas Intermediate Crude oil is now at $45.25 per barrel while gold settled at $1,329.30 per ounce at the end of today’s trading. (CNBC)
A Wall of Worry
It’s an old Wall Street adage – bull markets climb a wall of worry. And that seems to be the case once again, as the 2016 bullish readings on investor sentiment had recently approached the lowest levels in over 20 years (American Assoc of Individual Investors).
While there are plenty of factors that have fueled worries, let’s first look at what’s powering stocks, and pushing the Dow Jones Industrials and the S&P 500 Index higher—
- Fear of turmoil following the U.K.’s Brexit vote is fading.
- Earnings season is getting underway, and early readings have been reasonable (Thomson Reuters).
- Several economic reports last week surpassed expectations (Bloomberg).
- Any rate hikes by the Federal Reserve are likely to come at a gradual pace.
- Finally, S&P 500 companies are pouring cash into stock buybacks (S&P Dow Jones Indices).
Our Outlook:
The financial markets have moved as we had expected so far in the second half of this year. Back in March we added some exposure to stocks/stock funds for all risk levels with the opinion the markets would move higher during the second half of this year and interest rates would move lower. With the exception of the “Brexit” two-day stock decline, the movement for stocks has been generally higher and now the major U.S. stock indices are sitting at 2016 highs. Interest rates have also dropped, and we would expect low rates to remain in general for the foreseeable future. We will continue to monitor the situation and make adjustments as warranted.
Negative bond yields
The skies never completely clear, however, and uncertainties remain. Although the turbulence in Europe has subsided, it lingers in the background and has played a role in forcing some European and Japanese government bond yields below zero. That’s right, there are investors who are willing to pay governments to hold their cash.
In some respects, it’s the tale of two markets. While stocks are telegraphing fewer worries, global bond markets are in an extreme defense mode. There was approximately $11.7 trillion in global government debt yielded below zero (Fitch Ratings) as of late June.
Longer Maturities Drive Growth of Negative Yielding Bonds
$ Trillions
Source: Fitch Ratings Date: 6.27.16
That level increased to nearly $13 trillion last week, according to Bank of America Merrill Lynch (Wall Street Journal). In early 2014, it was practically zero.
Nearly all of this is occurring in Japan and Europe, which have been experiencing stagnant economies, the absence of inflation, significant central bank bond buys, and negative rates set by their central bankers.
Why might investors pay governments to hold their cash? Well, there is the perception of safety. Plus, there are expectations investors can sell the bonds at a profit if yields fall further, and the outside chance a serious bout of deflation will set in. In other words, when the debt matures, you get paid back in a more valuable currency. The immediate impact at home as been to drive longer-term Treasury yields to new lows, as foreign investors seek higher returns outside their respective nations.
Negative interest rates in the U.S.?
The goal of negative rates is to spur banks to lend, rather than pay to park loanable funds at their country’s central bank. But negative rates haven’t sparked strong economic growth in Europe or Japan, and it appears to have increased anxieties. In the event of a recession the Federal Reserve is considering rates below zero. However, the lack of any meaningful economic gains in other nations suggest negative rates in the U.S. are just a distant possibility.
We appreciate the privilege to serve each of you and look forward to working with you all in the years to come. As always, please don’t hesitate to call or email us at any time if we can be of further service in any way.
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.