Social Security Update

The 2013 Trustee’s report for Social Security was released May 31st showing little change from last year.  The Trustees project that the combined reserves of the OASI and DI Trust Funds will increase for the next several years, through 2021.  Beginning in 2021, annual costs will exceed total income, and therefore reserves begin to decline, reaching $2,866 billion at the beginning of 2023.

By 2033 the trust fund will be exhausted.  At that time income will be sufficient to pay 77% of promised benefits through 2087, the end of the trustees’ 75-year time horizon. The trustees’ assumptions changed only slightly from last year, with positive factors essentially balancing out negative ones.  Lower tax rates and increasing longevity account for a worsening of the system’s condition, while changes in immigration assumptions improve it.  (SaavySocialSecurity.net, Horsesemouth.com)

 The Markets:

Bonds come under pressure

Mix in some relatively upbeat economic data, albeit nothing impressive, and sprinkle in talk from various Federal Reserve members, including Ben Bernanke himself, that we might see a slightly less aggressive monetary policy within a few months and you can quickly create a recipe for a sell-off in bonds.  Stocks declined sharply on Friday to end last week on a negative note, but managed to hold on to gains for the month overall.  The Dow closed at 15,115.57 and the S&P 500 finished last week at 1,630.74.  This was off the closing high on May 21st of 1,669.16.  (GoogleFinance.com)

 The yield on the 10-year U.S. Treasury rose from 1.66% on May 1 to 2.16% as of May 31 (U.S. Treasury Dept.) on just the scenario presented above (bond prices and yields move in opposite directions).

Let’s recap the events that led to the latest turnaround in the bond market.

First, the May 3rd release of the labor report reflected a better-than-forecast rise in nonfarm payrolls (BLS, Bloomberg) in April and upward revisions to February and March. Though not very impressive on an absolute basis (165,000 in April), the increase suggested the economy didn’t appear to be slowing too quickly, which encouraged some investors to move out of bonds.

Then we received some better-than-expected economic data in the form of an improvement in consumer confidence and another jump in home prices (Case Shiller Home Price Index).  Moreover, Bernanke’s May 22nd testimony that the Fed could reduce its bond purchases in the next few months also created an atmosphere that encouraged an exodus out of the bond market.  He did, however, leave both sides of the equation open, including more Fed bond buying if needed.

How does all of this affect bonds? Stronger economic data have historically encouraged selling in fixed income debt. In addition, a consistent improvement in the data is a prerequisite for the Fed to reduce its outlays for Treasuries and mortgage-backed securities.

Whether or not we will see a more consistent stream of upbeat economic data is still up for debate. Notice that the economic reports that sparked some of the selling – rising home prices and improving consumer confidence – come under the category that might be considered “intangibles.”  In other words, they do not take the pulse of the real economy, i.e., items such as retail sales or production. Yes, improving confidence could lead to an increase in consumer spending. And higher home prices might lessen the anxiety about the economy and also encourage spending. But it’s not a perfect correlation.

Further, the yield on the 10-year Treasury has increased by the recent amount or more over a 30-day rolling period on six other occasions since early 2009 and rates failed to sustain any upward trend (Federal Reserve data).

Our view remains the same as we now look for interest rates to stabilize, and potentially fall during the balance of this year. This would make fixed income (bonds) assets even more attractive for the short term due to higher yields than we saw just a month ago.  Commodity prices also continued to show some weakness in May, and we look for that trend to possibly change as well.  It appears gold prices could be stabilizing and possibly putting in a bottom for now.

We still believe a stock market correction of some type-anywhere from 5-10%+- could occur at any point given the current environment.  We anticipate rebalancing our portfolios this week for all risk levels in an attempt to position accounts for what we expect to see in the coming months.  We will keep you advised.

The European Central Bank meets this Thursday. It has previously hinted (Bloomberg, ECB) it may unveil a new program designed to foster bank lending and squash a recession that has pushed the euro-zone unemployment rate to 12.2% (Eurostat).  As we’ve seen in the past, new measures, or the lack thereof, have reverberated here at home.

We had another round of severe weather again in our area last Friday, with both tornadoes and record rainfall creating flash flooding over the weekend.  We continue to keep our neighbors that have lost loved ones or property in our thoughts and prayers.  Let us know if we can be of further service in any way or if you have any questions or concerns.  We appreciate the privilege to serve each and every one of you.

God Bless,

Your TEAM at F.I.G. Financial Advisory Services, Inc.

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