August 25, 2015
The Markets
Correction!
The Dow Jones Industrial
Average lost about 6 percent last week. That puts the benchmark index about 10
percent below its record high on May 19, 2015, according to Barron’s.
A drop of that magnitude from
a new high may be a correction – a brief but jarring drop in value that often
causes investors to reassess the state of the market and the health of the
companies they hold. If investors judge markets and holdings to be sound, a
correction may represent a buying opportunity. Of course, there is a chance
markets could fall further. A drop of 20 percent or more is considered a bear
market.
The Standard & Poor’s 500
Index lost about the same amount as the Dow last week and is down almost 8
percent from its May high. Technically, it’s not yet in correction territory. A
dip greater than 5 percent and less than 10 percent is a pullback.
Many factors contributed to
U.S. stock markets’ performance last week. Concerns about global recovery were top
of mind for many investors. China’s slowdown may significantly reduce demand
for commodities, and emerging markets that are dependent on commodity exports
are struggling. CNN Money reported:
“China's
economic slowdown and currency devaluation have investors worried that things
could get worse as the year goes on. Developing countries like Brazil and
Russia are struggling to revive their economies as their currencies depreciate
dramatically against the dollar. Brazil's currency value has declined over 20
percent and Russia's over 40 percent, hurting imports and everyday citizens.
It's also a huge worry for America's biggest companies. About 44 percent of the
revenues from S&P 500 companies come from outside the United States.”
Currency depreciation (not to
be confused with devaluation, which is a government’s deliberate downward
adjustment in currency value) is market-driven and sometimes causes investors
to pull assets out of a country, which can put more pressure on the currency.
Uncertainty about the timing
of a rate hike in America didn’t help matters. CNBC reported, after the minutes of the
July Federal Open Market Committee meeting were released last week and
indicated “almost all members” had some concerns about the strength of U.S.
economic growth, the CME FedWatch barometer put the likelihood of a September
increase at 24 percent – a 45 percent drop from the prior day.
Data as of 8/21/15
|
1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
|
Standard &
Poor's 500 (Domestic Stocks)
|
-5.8%
|
-4.3%
|
-1.1%
|
11.7%
|
13.1%
|
4.9%
|
Dow Jones Global
ex-U.S.
|
-5.0
|
-4.9
|
-13.1
|
2.8
|
2.5
|
1.7
|
10-year Treasury
Note (Yield Only)
|
2.1
|
NA
|
2.4
|
1.8
|
2.6
|
4.2
|
Gold (per ounce)
|
3.4
|
-3.6
|
-9.3
|
-11.0
|
-1.2
|
10.2
|
Bloomberg Commodity Index
|
-2.8
|
-15.8
|
-30.0
|
-15.6
|
-7.7
|
-6.1
|
DJ Equity All REIT Total Return Index
|
-2.4
|
-1.8
|
4.3
|
9.8
|
13.7
|
7.3
|
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.
From abstract to reality: the potential effects of rising rates.
When the economic data align,
and the Federal Reserve pulls the trigger on tighter monetary policy, rising
interest rates may affect everything from mortgage rates to bond yields to
economic growth. Here are a few of the possible consequences:
·
Higher demand for short-term bonds. When interest rates rise, bond values fall, and vice
versa. However, changes in bond values will be influenced by the speed and
magnitude of the rate change. A sharp increase over a short period would have a
greater effect than a gradual rise over a longer period. To date, the Fed has
indicated the fed funds rate will rise gradually. Experts cited by The Wall Street Journal suggest shorter-term
bonds and cash will be more attractive than longer-term bonds for a period of
time.
·
Less attractive loan terms and credit card incentives. By raising the fed funds rate, the Fed will increase
borrowing costs. That’s likely to affect mortgage rates as well as automobile
and other consumer loan rates. The
Journal cautioned homebuyers to be wary of adjustable-rate mortgages and
indicated zero percent introductory offers on credit cards may disappear.
·
Slow improvement in savings account returns. Over the longer term, rising rates may prove to be a
boon for savers, but there is likely to be little immediate change in the
yields offered on savings accounts. That’s because banks set these rates. In
general, banks raise rates to attract deposits and few banks need to do that
right now, according to an expert cited by The
Wall Street Journal.
While it seems
counterintuitive, tightening monetary policy will not affect interest rates
equally across all markets.
Weekly
Focus – Think About It
“The individual investor should act consistently as an
investor and not as a speculator.”
--Benjamin Graham, American economist
Best 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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Sources:
http://www.barrons.com/articles/stocks-swooned-but-didnt-crash-1440224891?mod=trending_now_2 (or go to http://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/08-24-15_Barrons-Stocks_Swooned_but_Didnt_Crash-Footnote_1.pdf)
http://www.federalreserve.gov/monetarypolicy/fomcminutes20150729.htm (or go to http://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/08-24-15_FedReserveSystem-FOMC_Minutes_07-29-15-Footnote_10.pdf)
http://www.wsj.com/articles/how-your-rates-will-move-when-the-fed-does-1433732576 (or go to http://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/08-24-15_WSJ-How_Your_Rates_Will_Move_When_the_Fed_Does-Footnote_11.pdf)
