The Markets:

Last week, we examined various events that have led to a recent jump in longer-term bond yields (drop in bond prices), including Fed Chief Ben Bernanke’s May 22nd testimony the central bank could, “in the next few meetings,” begin to slow (or taper) its pace of bond buys.  Remember, the monthly bond purchases are aimed at boosting the economy by holding down long-term interest rates and pushing up asset prices like stocks and housing, hoping it will spur spending, hiring, and business investment.

We mentioned how the yield for the 10 Year U.S. Treasury had hit the current levels in the past few years, only to retreat once again to lower levels.  Will it happen this year as well?  Only time will tell and we will have to wait and see what occurs this time around.  The chart below illustrates the results since 2009.


Source:  Charles Sherry and St. Louis Federal Reserve Board

 Why is this important?  If rates do indeed fall off once again for the overall bond market, price of corresponding bond categories should rise because bond prices and yields have an inverse relationship.

We still maintain our current view that U.S. stocks are presently overvalued and look for some type of stock market “correction” to occur, with stock indices dropping possibly 5-10% at any point.  We completed a rebalancing of our portfolios last week for all risk levels in an attempt to prepare for what we see moving forward as well as trying to take advantage of lower bond and commodity prices. (Buy low, Sell high).  We reduced our overall stock/equity exposure again as well.  Patience will be crucial in order to try and look ahead rather than behind as to what asset categories may outperform for the balance of this year and into next.  We continue to monitor the situation and will make changes as we feel are warranted.

Surprisingly, most broad asset classes have not fared well so far in 2013 outside of U.S. stocks (as measured by the Standard & Poor’s 500 stock index), Japanese stocks, and small gains in the European stock indices in the Euro Zone.  The following chart shows the overall results for different assets measured by the corresponding ETF (Exchange Traded Fund) through June 1st.  The black circle above each bar indicates the high point so far in 2013.


Taper talk

‘Taper’ has become the Street-favored word for how the Fed might eventually begin to gradually reduce its bond purchases of $85 billion each month.

 Taper talk was rife last week, creating some volatility in equities and bonds prior to Friday’s release of the labor report. Like last month, investors were braced for a weak number. But during the month of May, the Bureau of Labor Statistics (BLS) reported a slightly-better-than-expected 175,000 rise in nonfarm payrolls (Bloomberg), up from a downwardly revised 149,000 in April, signaling an economy that is gradually expanding and not in immediate danger of stalling.

In the meantime, the unemployment rate ticked up from April’s 7.5% to 7.6% in May. The separate survey that produces the jobless rate also detected employment growth, but the labor force grew at a faster pace, pushing up the closely-watched rate by 0.1% (BLS).

A couple of reasons why the Fed may be cautiously optimistic it could soon be able to taper bond buys: housing is contributing to the recovery in a way that had been absent in the past, and state and local cutbacks appear to be waning. Yet, we still aren’t on a firm economic footing.

What is the “REAL” Unemployment Rate?

Nonfarm payrolls and the unemployment rate have drawbacks as yardsticks of the labor market.  For starters, nonfarm payrolls are subject to monthly revisions, and include temporary workers and part-timers that may want permanent and/or full-time work. And the unemployment rate doesn’t take into account those who have become so discouraged that they have given up looking for work. Neither is one counted as officially jobless if he/she works part time but wants full-time employment. Including those categories, the unemployment rate rises to 13.8% (BLS – U6 unemployment rate).

Bottom line

Fast employment growth might be viewed as a hindrance to equities since it could force the Fed to taper its bond buys (the Fed’s super accommodative monetary policy has been one reason stocks have rallied this year).  Never mind that faster employment growth sparked by faster economic growth would likely support corporate profits.  If you are wondering when the Fed plans to end its bond buying spree, it has said it will continue “until the outlook for the labor market has improved substantially.” We aren’t there yet.

We hope you all have a wonderful week ahead, and as always, please call if you have any questions or concerns, or 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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