PEEK OF THE WEEK
August 29, 2016
Leif Hagen and Donna Roberts
The
Markets
Attention investors: U.S. interest
rates may be moving up and it might happen this year.
During last Friday’s speech at the
Federal Reserve’s annual economic symposium in Jackson Hole, Wyoming, Fed
Chairwoman Janet Yellen signaled that a rate hike is probably coming but, as
usual, she didn’t offer any specifics about the timing:
“…Indeed, in light of the continued
solid performance of the labor market and our outlook for economic activity and
inflation, I believe the case for an increase in the federal funds rate has
strengthened in recent months. Of course, our decisions always depend on the
degree to which incoming data continues to confirm the Committee's outlook.”
There’s a good chance the increase
could occur during 2016. Goldman Sachs
economists, cited by Bloomberg, said
the subjective odds of a September rate hike increased from 30 percent to 40
percent last week. Bloomberg’s data
suggests a 65 percent chance of a rate hike by December.
The U.S. bond market responded with
a flattening of the yield curve. When the bond yield curve is flat, short-term
and long-term bonds of similar credit quality offer investors almost the same
rates. Barron’s explained: “A flattening yield curve can indicate economic
weakness. It signals investors expect inflation (and interest rates) to stay
low for a long time.”
Why would the yield curve flatten
as the Fed raises rates? One expert told Barron’s
he expects a Fed rate hike to lower inflation expectations, causing interest
rates on longer-term benchmark Treasuries to move lower.
Stock investors weren’t thrilled
about Yellen’s comments last week, and major U.S. indices largely finished the
week lower.
Data as of 8/26/16
|
1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
|
Standard &
Poor's 500 (Domestic Stocks)
|
-0.7%
|
6.1%
|
11.8%
|
9.4%
|
13.0%
|
5.2%
|
Dow Jones
Global ex-U.S.
|
-0.9
|
2.9
|
4.4
|
-0.4
|
2.2
|
-0.1
|
10-year
Treasury Note (Yield Only)
|
1.6
|
NA
|
2.2
|
2.8
|
2.2
|
4.8
|
Gold (per
ounce)
|
-2.1
|
24.2
|
17.7
|
-2.4
|
-5.9
|
8.0
|
Bloomberg Commodity Index
|
-1.5
|
8.2
|
-0.2
|
-13.5
|
-12.0
|
-6.7
|
DJ Equity All REIT Total Return Index
|
-0.4
|
13.1
|
24.3
|
14.9
|
14.5
|
6.7
|
S&P
500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude
reinvested dividends (gold does not pay a dividend) and the three-, five-, and
10-year returns are annualized; the DJ Equity All REIT Total Return Index does
include reinvested dividends and the three-, five-, and 10-year returns are
annualized; and the 10-year Treasury Note is simply the yield at the close of
the day on each of the historical time periods.
Sources:
Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past
performance is no guarantee of future results. Indices are unmanaged and cannot
be invested into directly. N/A means not applicable.
why aren’t American businesses investing? For quite some time, American
consumers have made the largest contribution to U.S. gross domestic product
(GDP) growth. During the second quarter of 2016, personal spending and exports
made positive contributions to GDP. These were largely offset by negative
contributions from “private inventory investment, residential fixed investment,
state and local government spending and nonresidential fixed investment.”
Last
week, The Economist pondered why
businesses are not investing:
“Firms
are on a six-year hiring spree that shows little sign of abating; payrolls
swelled by an average of 190,000 a month between May and July. Competition for
workers is pushing up wages. The median pay rise in the year to July was 3.4%,
according to the Federal Reserve Bank of Atlanta. Americans are spending that
cash; in the second quarter, consumption per person grew at an annual pace of
5.5%, equaling its fastest growth in a decade. Yet real GDP is expanding by
only 1.2% a year. The culprit seems to be business investment, which has fallen
for three consecutive quarters.”
The Economist reflected on the
effects of low oil prices, questioning whether weak demand for goods or tighter
credit was the culprit behind low business spending. It concluded that slow
trend growth (the rate at which the U.S. economy is expected to grow over a
period of time) is producing fewer opportunities for profitable long-term
investment, and offered the opinion that a solution could be found in fiscal
policy:
“Businesses anticipating slower long-term growth cannot be
expected to invest much. And politicians cannot easily conjure up technological
progress. But they can boost competition, simplify taxes and regulation, and
invest in infrastructure and education, all of which would help to raise American
productivity.”
Of course, getting politicians to agree on a course of action and
implement a coherent fiscal policy is a tall order.
Weekly Focus – Think
About It
“When we decided not to sell our business
people called us a lot of things besides crazy – things like arrogant and
entitled. The same words that I've heard used to describe our generation time
and time again. The Millennial Generation. The 'Me' Generation. Well, it's
true. We do have a sense of entitlement, a sense of ownership, because, after
all, this is the world we were born into, and we are responsible for it.”
--Evan
Spiegel, CEO of Snapchat
End of August regards,
Leif M. Hagen
Leif M. Hagen, CLU, ChFC
LP Financial Advisor
Securities offered through LPL Financial Inc., Member FINRA/SIPC.
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* This newsletter was
prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with
the named broker/dealer.
* The Standard & Poor's
500 (S&P 500) is an unmanaged group of securities considered to be
representative of the stock
market in general. You cannot invest directly in this index.
* The Standard & Poor’s
500 (S&P 500) is an unmanaged index. Unmanaged index returns do not reflect
fees,
expenses, or sales charges.
Index performance is not indicative of the performance of any investment.
* The 10-year Treasury Note
represents debt owed by the United States Treasury to the public. Since the
U.S.
Government is seen as a
risk-free borrower, investors use the 10-year Treasury Note as a benchmark for
the long-term bond market.
* Gold represents the
afternoon gold price as reported by the London Bullion Market Association.
The gold price is set twice
daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in
U.S. dollars per fine troy ounce.
* The Bloomberg Commodity
Index is designed to be a highly liquid and diversified benchmark for the
commodity futures market. The Index is composed of futures contracts on 19
physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT
Total Return Index measures the total return performance of the equity
subcategory of the Real Estate Investment Trust (REIT) industry as calculated
by Dow Jones.
* Yahoo! Finance is the
source for any reference to the performance of an index between two specific
periods.
* Opinions expressed are
subject to change without notice and are not intended as investment advice or
to predict future performance.
* Economic forecasts set
forth may not develop as predicted and there can be no guarantee that
strategies promoted will be successful.
* Past performance does not
guarantee future results. Investing involves risk, including loss of principal.
* You cannot invest directly
in an index.
* Consult your financial
professional before making any investment decision.
* Stock investing involves
risk including loss of principal.
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