March 24, 2015
The Markets
Financial markets gave the Federal Reserve a standing
ovation last week. At least, that was Barron’s
interpretation. What did the Fed do to deserve it?
“…the Fed did what everyone expected, signaling that
it could raise interest rates at any meeting starting in June. Yet, Yellen and
team still found a way to assure the market that it wouldn’t do anything rash,
insisting that the labor market would need to strengthen further, and that
inflation would have to be heading for its 2 percent target before they make a
move. Even then, the projected path of interest-rate hikes would be slow and
steady – and unlikely to undermine the market.”
Stock markets in the United States weren’t the only
ones heading toward, or surpassing, new highs. The Fed’s reassurances about the
pace at which it would normalize monetary policy pushed markets across the
Eurozone higher, too. Reuters
reported global investors were feeling confident a weaker euro could goose the
region’s economy.
There is some optimism about shorter-term market
potential. Experts cited by Barron’s
suggested the chance for a stock “melt-up,” which would lift the Standard &
Poor’s 500 Index (S&P 500) higher, were pretty good.
However, others believe the longer-term outlook for
stocks, as a whole, may temper investors’ enthusiasm. Barron’s explained earnings growth for the S&P 500 is well
below its 30-year average, dividend yields are well below their 20-year
average, and the index’s valuation is “so high that it is projected to subtract
2.6 percent annualized from returns. Put it together and investors are likely
to earn just 0.4 percent after inflation.”
One thing is for sure: It’s awfully difficult to
predict the future with any accuracy. Barron’s
warned about the quirks of market forecasts, offering an example from a decade
ago. “In January 2005, expected returns were just 0.4 percent, yet the S&P
500 gained 5.6 percent annualized during the next 10 years.”
Data as of 3/20/15
|
1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
|
|
Standard & Poor's 500 (Domestic Stocks)
|
2.7%
|
2.4%
|
12.6%
|
14.5%
|
12.6%
|
5.9%
|
|
10-year Treasury Note (Yield Only)
|
1.9
|
NA
|
2.8
|
2.4
|
3.7
|
4.5
|
|
Gold (per ounce)
|
2.7
|
-1.4
|
-10.8
|
-10.6
|
1.5
|
10.6
|
|
Bloomberg Commodity Index
|
2.0
|
-4.6
|
-25.3
|
-11.7
|
-5.5
|
-4.8
|
|
DJ Equity All REIT Total Return
Index
|
5.4
|
6.8
|
28.4
|
15.3
|
15.8
|
9.7
|
S&P 500, 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.
It may seem like
a good idea today... If anyone needs more
evidence that focusing on short-term corporate performance can be detrimental
to longer-term outcomes, look no further than the effect of the strengthening
U.S. dollar on companies outside the United States that issued debt denominated
in U.S. dollars. The Economist
explained:
“Dollar borrowing is everywhere, but the biggest
growth has been in emerging markets. Between 2009 and 2014 the
dollar-denominated debts of the developing world, in the form of both bank
loans and bonds, more than doubled, from around $2 trillion to some $4.5
trillion, according to the Bank for International Settlements (BIS)… Recent
months have seen… an Indian property developer… a South African power
generator, and… a Turkish firm that makes TV dinners, sell dollar-denominated bonds.
By borrowing dollars at several percentage points below the prevailing interest
rate in their domestic currency, CEOs have pepped up profits in the short term.”
As it turns out, dollar-denominated debt may not work
out so well in the long run. In recent weeks, the value of currency in many
countries has declined relative to the U.S. dollar which has been
strengthening. As a result, the amount of interest owed on bonds issued and
loans taken in U.S. dollars has increased significantly when measured in local
currency terms. Unless a company has U.S. dollar earnings to help offset the
expense, the higher cost of its debt can hurt the company.
The New York
Times cited a leading electric
utility in India that is selling facilities and renegotiating debt after its
debts increased thirty-fold in just a few years. In Brazil, some sugar
producers have declared bankruptcy, in part, because of U.S. dollar debt and
falling sugar prices.
The Times
also pointed out, “…the rising dollar and falling emerging-market currencies
cut both ways for the economies in question. Even as companies that gorged on
dollar debt run into trouble, falling currency values make exporters more
competitive on global markets.” In January, the International Monetary Fund
projected economic growth in emerging countries will increase from 4.3 percent
in 2015 to 4.7 percent in 2016.
Weekly Focus – Think About It
“If you obey all the rules you miss all
the fun.”
--Katharine
Hepburn, Actress
Best regards,
Leif M. Hagen
Leif
M. Hagen, CLU, ChFC
LP Financial Advisor
P.S. Please feel free to forward this commentary
to family, friends, or colleagues. If you would like us to add them to our
list, please reply to this e-mail with their e-mail address and we will ask for
their permission to be added.
P.S.S. Also, please remind your
friends and family members becoming Medicare eligible that we offer Medicare insurance
and Part D options with NO CHARGE to work with me as their agent.
Securities
offered through LPL Financial Inc., Member
FINRA/SIPC.
Please FOLLOW and “LIKE US” on FACEBOOK.com/HagenFN
Please FOLLOW our "TWEETS" on Twitter.com/SafeLeif
* 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.
* To unsubscribe from the
“Peek of the Week”, please reply to this email with “Unsubscribe” in the
subject line, or write us at: Hagen Financial Network, Inc. 4640 Nicols Road,
Suite 203; Eagan, MN 55122.
Sources:
http://online.barrons.com/articles/time-to-bail-on-the-market-1426895825?mod=BOL_hp_we_columns (or go to http://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/03-23-15_Barrons-Time_to_Bail_on_the_Market-Footnote_1.pdf)
http://online.barrons.com/articles/SB52018153252431963983004580522151660304116?mod=trending_now_5 (or go to http://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/03-23-15_Barrons-Fed_Still_Playing_a_Waiting_Game-Footnote_2.pdf)
http://online.barrons.com/mdc/public/page/9_3063-economicCalendar.html?mod=BOL_Nav_MAR_hpp (Click on U.S. & Intl
Recaps, “The Fed throws its weight,” scroll down to “Global Stock Market Recap”
chart) (or go to http://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/03-23-15_Barrons-Global_Stock-Market_Recap-Footnote_3.pdf)
http://www.economist.com/news/finance-and-economics/21646803-debt-ridden-emerging-markets-are-heading-nasty-dollar-hangover-feeling-green (or go to http://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/03-23-15_TheEconomist-Feeling_Green-Footnote_5.pdf)
http://www.nytimes.com/2015/03/17/upshot/how-a-rising-dollar-is-creating-trouble-for-emerging-economies.html?_r=0&abt=0002&abg=0 (or go to http://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/03-23-15_TheNYTimes-How_a_Rising_Dollar_is_Creating_Trouble-Footnote_6.pdf)
