May 11, 2015
The Markets
Government bonds have gone wild!
Sure, you might expect high-yield bonds to act
unpredictably from time to time. That’s why they’re high-yield bonds. They
don’t receive investment-grade ratings – BBB through AAA – from leading credit
rating agencies because they’re not considered to be as creditworthy as
investment grade bonds and carry a high degree of risk.
U.S. Treasuries are a different story. They are backed
by the full faith and credit of the U.S. government which can raise taxes to
cover its debts. Treasuries are considered by many to be one of the safest
investments around. As a result, they’re usually pretty stable and stodgy.
That wasn’t the case last week, though. The U.S.
Treasury chased after its cousin, the Bund, which is issued by the German
government. The Bund has been on a tear recently. Experts cited by Bloomberg.com reported a shift in
sentiment and fundamentals may have triggered European bond behavior that
“helped wipe $436 billion off the global fixed-income market in the past week.”
The performance of German bonds reverberated around
the world, according to Bloomberg.com,
affecting U.S., French, Spanish, Japanese, Australian, Polish, and Italian
government bond performance. Bond prices fell as yields rose higher. Barron’s reported:
“Seasoned observers must have been shaking their
heads. Not only do high-grade government bonds not normally gyrate more than a
few basis points in a day, those swings typically don’t move across oceans like
tsunamis.”
Since February, U.S. Treasury yields have risen from a
low of 1.67 percent without any significant change in fundamentals, according
to Barron’s. It could be that U.S.
markets think the Federal Reserve rate hike will occur sooner rather than
later. Last week, Chairwoman Janet Yellen voiced the opinion that stock market
valuations were, generally, pretty high. That could indicate the Fed is ready
to act.
Be prepared for a volatile ride until the uncertainty
driving markets begins to settle.
Data as of
5/8/15
|
1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
|
Standard & Poor's 500 (Domestic Stocks)
|
0.4%
|
2.8%
|
12.8%
|
15.8%
|
12.8%
|
6.0%
|
Dow Jones Global ex-U.S.
|
0.2
|
7.9
|
1.3
|
7.9
|
4.9
|
3.7
|
10-year Treasury Note (Yield Only)
|
2.2
|
NA
|
2.6
|
1.8
|
3.5
|
4.3
|
Gold (per ounce)
|
0.9
|
-1.1
|
-7.9
|
-9.6
|
-0.2
|
10.8
|
Bloomberg
Commodity Index
|
0.7
|
-0.2
|
-23.6
|
-8.6
|
-4.4
|
-3.7
|
DJ Equity
All REIT Total Return Index
|
0.7
|
-0.1
|
12.1
|
11.4
|
12.9
|
8.3
|
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.
reading the
unemployment tea leaves. Americans
have long relied on unemployment statistics to provide insights to our
country’s economic health. The Richmond
Federal Reserve defined full employment as “the level of employment at
which virtually anyone who wants to work can find employment at the prevailing
wage.” Interestingly, full employment is not zero unemployment because jobs are
being created and eliminated constantly.
Many analysts have been asking what full employment is
today, in part, because the Federal Reserve has said it will begin raising
short-term interest rates when the economy is nearing full employment (and
inflation is about two percent). It may turn out to be a trick question. The Economist wrote:
“Although the number of jobless Americans has fallen,
the share of the working-age population in the labor force has also dropped
considerably, from 66 percent before the financial crisis to less than 63
percent now. Temporary factors have affected the statistics, but much of the
change has been driven by structural factors such as retirement of the
baby-boomer generation and rising college enrollment. These developments may
explain why, as the unemployment rate has fallen from 10 percent in 2009 to 5.4
percent today, the Fed’s target long-run unemployment rate has also declined,
from 6 percent in 2013 to just 5.2 percent at present.”
On Friday, the Labor Department announced the
unemployment rate was 5.4 percent. However, there is some skepticism about
whether the American labor market really is close to full capacity. Experts
cited by The Economist suggest a
stronger jobs market might coax more people into the workplace. By their
estimates, America’s true unemployment rate is about 6.6 percent.
The Economist suggested labor market slack is one reason average
hourly earnings have remained sluggish. Many thought low oil prices would push
consumer spending higher. They did not. It looks like bad weather and stagnant
wages may be behind lethargic economic growth.
Weekly Focus – Think About It
“Your work is going to fill a large part
of your life, and the only way to be truly satisfied is to do what you believe
is great work. And the only way to do great work is to love what you do.”
--Steve Jobs, Co-founder, CEO, and
Chairman of Apple Inc.
Best regards,
Leif M. Hagen
Leif
M. Hagen, CLU, ChFC
LP Financial Advisor
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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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Sources:
http://online.barrons.com/articles/german-bunds-sneeze-u-s-stocks-get-a-cold-1431134125?mod=BOL_hp_we_columns (or go to http://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/05-11-15_Barrons-German_Bunds_Sneeze-Footnote_4.pdf)
http://www.economist.com/blogs/freeexchange/2015/05/americas-unemployment-rate (or go to http://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/05-11-15_TheEconomist-An_Incorrect_Dial-Footnote_6.pdf)
http://www.economist.com/blogs/freeexchange/2015/05/america-s-jobs-report (or go to http://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/05-11-15_TheEconomist-Just_Dont_Bet_on_a_Pay_Raise-Footnote_7.pdf)
