Weekly Market Commentary

November 23, 2015 

The Markets

Financial markets were remarkably calm last week.

Many stock markets in the United States, Europe, and Asia moved higher as investors chose to focus their attention on the minutes of the October 27-28, 2015 Federal Open Market Committee (FOMC) meeting, which were released on Wednesday, rather than recent terrorist attacks in Paris, Lebanon, Mali, and against Russia.

The FOMC minutes captured attention because they suggested even if the Federal Reserve does begin to tighten monetary policy in December, rate increases may be incremental and the target rate may not be as high as many imagined. Bloomberg reported:

“Fed officials received a staff briefing on the equilibrium real interest rate, or the policy rate that would keep the economy running at full employment with stable prices, according to the minutes. Fed officials discussed the possibility that the short-run equilibrium rate “would likely remain below levels that were normal during previous business cycle expansions,” the minutes said.”

Former Federal Reserve Chairman Ben Bernanke has written about the equilibrium real interest rate on his blog. The point he makes is the equilibrium rate – not the Fed – determines interest rates. The Fed uses its influence to move interest rates toward levels that are consistent with its estimate of the equilibrium rate. If the Fed pushes for rates that are too high, the economy may slow. If it pushes for rates that are too low, the economy may overheat. Not everyone agrees on this point, and that has led to debate between Mr. Bernanke and Former Treasury Secretary Lawrence Summers.

While the Fed is expected to begin tightening U.S. monetary policy, the European Central Bank (ECB) is expected to further loosen monetary policy in December. The Wall Street Journal reported the ECB is “prepared to deploy its full range of stimulus measures to fight low inflation…” The news was welcome. CNBC reported European markets closed the week at three-month highs.

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.

if there were a “Page Six” for finance and economics, emerging markets would be splashed across it.

Remember the saying, “Buy low and sell high?” Well, emerging markets have not performed well for quite a long time, and that has a lot of people speculating about what may happen in the next few years.  

Analysts at BlackRock opined, “Emerging-market (EM) equities are fighting an uphill battle, held back by an appreciating U.S. dollar, falling commodity prices, and flagging exports. These only add to their other medium-term struggles, such as dwindling corporate profits, declining productivity, and a dispirited investor base. With valuations of EM equities trading at the largest discount to their developed-market peers in 12 years, some opportunities are beginning to emerge.”

In fact, several economists and asset managers have begun to compare and contrast the attributes of various emerging markets. Some say China is a better bet than Latin America. Others like the opportunities in Southeast Asia. A Goldman Sachs analyst cited by Bloomberg cautioned, “…Colombia, South Africa, Turkey, and Malaysia still need to tackle their current-account imbalances; Russia, India, and Poland are among nations that have improved enough for their assets to rally…”

The point is there is a buzz building around emerging markets. Sometimes, when analysts begin to emphasize the potential of an asset class, investors are tempted to pile in. While emerging markets investments can be a valuable part of a well allocated and diversified portfolio, it’s a good idea to remember there are distinct risks which are not suitable for all investors associated with investing in emerging markets.

If you have questions about your financial strategy, please give contact your financial advisor.

Weekly Focus – Think About It

“All you need in this life is ignorance and confidence, and then success is sure.”

--Mark Twain

Best regards,

Lee Barczak

President

* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.  However, the value of fund shares is not guaranteed and will fluctuate. *Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features. * 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 Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index. * 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.

Weekly Market Commentary

November 9, 2015

The Markets

And, the Bureau of Labor Statistics (BLS) said…

U.S. job growth surpassed expectations in October. About 271,000 jobs were created across diverse industries: professional and business services, health care, retail, construction, and others.  That was a significantly higher number than predicted by economists who participated in a survey conducted by The Wall Street Journal. They expected to see 183,000 new jobs for October.

The BLS revised August and September jobs numbers higher overall and reported improvement on the wage front, too. Average hourly earnings increased by nine cents during October. For the year, hourly earnings are up 2.5 percent. Rising wages and a 5 percent unemployment rate “appear to indicate the labor market has reached full employment,” reported Barron’s.

Strong employment data supports the idea the Fed will begin to lift the Fed funds rate this year. On Friday, former Chairman of the Federal Reserve Ben Bernanke wrote in his blog:

“Wednesday was something of a trifecta for Fed watchers: Chair Yellen, Board Vice-Chair Stanley Fischer, and Federal Reserve Bank of New York president Bill Dudley (who is also the vice chair of the Federal Open Market Committee) all made public appearances. Moreover, the comments by all three members of the Fed’s leadership explicitly or implicitly supported the idea that a December rate increase by the FOMC is a distinct possibility. (The possibility of a rate increase is even more distinct with this morning’s strong job market report.)”

Markets responded swiftly, according to The Wall Street Journal, as investors repositioned their portfolios in anticipation of a rate hike. While stock market indices remained relatively steady, there was considerable volatility within certain sectors. An expert cited by the publication commented:

“…one of the big rotation trades on Friday was investors taking money out of companies such as utilities and real-estate-investment trusts, and putting it into those that are expected to benefit from higher rates, such as financial companies.”

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.

it wasn’t just about the budget. Last week, the bipartisan budget bill was signed into law, averting a U.S. default and deferring further battle over debt and spending levels until presidential and congressional elections are over, according to U.S. News & World Report.

The new law includes provisions that CBS Money Watch said are likely to strengthen Social Security and Medicare by improving the programs’ finances. Since the provisions also have the potential to reduce benefits for some Americans, they may not prove to be all that popular. Here are two of the changes that affect Social Security benefits:

• File-and-suspend strategies will be limited in 2016. This change could cost some Americans up to $50,000 in lifetime Social Security benefits, according to PBS News Hour. The strategy entails having a husband or wife file for Social Security benefits at full retirement age and then suspend the benefits immediately. This allows a spouse to claim a spousal benefit, while the husband or wife receives delayed retirement credits.

Effective May 1, 2016, no one will be able to voluntarily file and suspend benefits to make a spousal benefit available to a spouse or to protect the right to file for retroactive benefits.

• Restricted application strategies will not be an option after 2015. Restricted application also is a Social Security claiming strategy. It allows an applicant to receive spousal benefits while earning delayed retirement credits until age 70. Americans who meet age requirements in 2015 can employ the strategy; younger Americans cannot.

If you are currently employing these strategies, you are probably grandfathered. We’ll know more when the Social Security Administration offers some insight as to how the new rules will be interpreted. That’s expected to happen before the end of the year. In the meantime, if you have questions about how this may affect your retirement plans, please contact your financial advisor.

Weekly Focus – Think About It

“The easiest thing to be in the world is you. The most difficult thing to be is what other people want you to be. Don't let them put you in that position.”  --Leo Buscaglia, American author and motivational speaker

Best regards,

Lee R Barczak

President

* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.  However, the value of fund shares is not guaranteed and will fluctuate.  *Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.  * 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 Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.  * 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.

Weekly Market Commentary

October 19, 2015

The Markets

How quickly emotions have changed since August. Worry? Angst? It’s already priced into the markets, according to some experts.

Last week, Barron’s published the results of its Big Money Poll, a biannual survey of professional investors and money managers. A majority of those surveyed (55 percent) were bullish about U.S. markets’ prospects through June 2016, 29 percent were neutral, and 16 percent were bearish. That’s a big shift. Last spring, just 45 percent of those polled were bullish and nearly one-half were neutral. This time around, things are different:

“After a wild and crazy summer for U.S. stocks, marked by an 11 percent correction in August, Wall Street’s bulls are showing conviction again…the pros expect stocks to rise by as much as 7 percent through the middle of 2016, propelled by a growing economy and gains in corporate profit. The Big Money investors see fresh value in beaten-up energy stocks and financials, as well as dividend-paying blue chips. And, they don’t expect a likely interest-rate hike – when it comes – to break the bull’s stride for long.”

Investors who participated in the American Association of Individual Investors’ October 14 Sentiment Survey weren’t quite so optimistic. The survey showed just 34 percent of investors were bullish, 39 percent were neutral, and 27 percent were bearish. The bulls were down 3 percent from the previous week, and the bears gained a percent. Uncertainty seemed to be the name of the game, though, as the number of investors who held neutral opinions increased by 4 percent.

As an interesting side note, the professionals surveyed by Barron’s estimated the number of investors who weren’t sure where markets are headed was much larger – 76 percent!

If you’re a contrarian – an investor who does not subscribe to popular opinion – there are a lot of opinions to consider.

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.

it’s not always a good idea to rollover company stock from a 401(k) plan to an IRA. In fact, doing so might mean you pay more in taxes to Uncle Sam than necessary.

If company stock held in an employer-sponsored 401(k) plan has appreciated, the difference between the amount paid for shares (the cost basis) and the current value of those shares is known as net unrealized appreciation (NUA). For instance, if an investor paid $10 a share for 1000 shares ($10,000) for stock that is now worth $15 a share, then the investment is worth $15,000, and the NUA is $5,000.

If the shareholder completes a rollover from a 401(k) plan to an IRA, those shares of company stock will be liquidated, along with the other assets in the account, and moved to an IRA where the assets will have an opportunity to continue growing tax-deferred. When the assets are distributed from the IRA, they may be taxed as ordinary income. If the investor is in the 28 percent tax bracket, the taxes owed would be about $4,200.

There is an alternative that could be a better choice tax-wise. An investor can request company stock be distributed in-kind and sent to a taxable account. The stock is not liquidated. The shares are moved to the new account. The investor may owe ordinary income taxes (and penalties if he or she is not yet age 59½) on the cost basis ($10,000). However, the net unrealized appreciation ($5,000) will not be taxed until the shares are sold. Taxes on the cost basis would be about $2,800.

If the investor takes a distribution right away, and the shares have been held for more than one year, the proceeds may be taxed at the long-term capital gains tax rate, which is currently lower than the ordinary income tax rate. If the investor is in the 15 percent capital gains tax bracket, another $750 would be owed in taxes. In this example, the investor could save about $650 in taxes overall.

Please keep in mind this is a hypothetical example and is not representative of any specific situation.  Each investor is unique and your results may vary.  Executing an NUA strategy seems pretty straightforward, but it can be tricky and not everyone is eligible. If you would like to learn more, please give your tax professional a call.

Weekly Focus – Think About It

“If you wish to forget anything on the spot, make a note that this thing is to be remembered.”

--Edgar Allan Poe, American poet

Best regards,

Lee R Barczak

President

* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.  However, the value of fund shares is not guaranteed and will fluctuate. *Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features. * 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 Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index. * 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.

Weekly Market Commentary

September 7, 2015

The Markets

Who’s the culprit?

Speculating on who or what is to blame for recent market weakness is a popular pastime right now. Last week, Barron’s said the search for someone to blame is a lot like a game of Clue. So far, the most common conclusions are “the People's Bank of China with a devalued currency in Beijing,” and “Janet Yellen with a potential interest-rate hike in Washington.”

The article pointed out those theories might be flawed. After all, China’s slowdown wasn’t a surprise. Analysts have been factoring slower growth into their calculations for some time. U.S. rate hikes are highly anticipated and, even though some fear they could tip the American economy into recession (and argue recent stock price movement supports the claim), relatively strong economic data casts doubt on the idea. Some analysts believe the stock market can help predict where a country’s economy is headed. A significant drop in stock prices could be indicative of a future recession and a significant increase could suggest future economic growth.

So, why have markets headed south? Barron’s offered an alternative answer: Investors with volatility trading strategies (and/or a case of nerves) across the globe. The article pointed out the CBOE Volatility Index (VIX), a.k.a. the fear gauge, popped from a low of 13 to a high of 53 between August 18 and August 24:

“That’s higher than when Standard & Poor's cut the credit rating of the United States in 2011, or at the peak of the European debt crisis in 2010, and seems extreme given the evidence. But volatility isn’t simply a measure of fear. It has been used to manage risk in portfolios that employ sophisticated trading schemes… Although each type of fund adjusts to market changes at a different speed, they all respond in the same way – by selling stocks… Don’t just blame the professionals. For months now, there have been warnings about overcrowding in the market’s best-performing stocks. And, when the market started to tumble in August, these stocks were among the hardest hit…”

So, who caused the market downturn? Take your pick.

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.

the travails of emerging markets. Just a few years ago, emerging markets were the toast of the town. In general, emerging countries recovered much faster than developed countries following the financial crisis and global recession. The MSCI Emerging Markets Index delivered pretty remarkable (and highly volatile) performance during the past decade. According to the MSCI fact sheet, annual returns have ranged from down 53.33 to up 78.51:

            Annual Returns (%)

               2005          34.00

               2006          32.14

               2007          39.42

               2008         -53.33

               2009          78.51

               2010          18.88

               2011         -18.42

               2012          18.22

               2013           -2.60

               2014           -2.19

Through September 4, the Emerging Markets Index was down 17.54 percent. While that’s a significantly smaller swing than some we’ve experienced during the past 10 years, any double-digit dip demands attention. The Wall Street Journal explained the downturn like this:

“China’s economic slowdown is having broad implications, hitting regional economies like Taiwan, Malaysia, and Vietnam where manufacturing data showed declines for August. Emerging markets are also nervous about the possibility of an interest-rate increase in the United States, which would encourage global investors to invest more there. China’s Shanghai Composite Index is down 39 percent after hitting a seven-year high in June.”

Indeed, money is moving back into the United States. Experts cited by The Economist said about $44 billion has been pulled from emerging markets since mid-July.

Christine Lagarde, Managing Director of the International Monetary Fund (IMF), indicated the IMF’s outlook for global growth was likely to be revised downward, in part, because emerging economies are at risk of being negatively affected by commodity price weakness, China’s slowdown, and America’s monetary policy.

How bad will it get in emerging markets? The IMF’s July projection was that emerging market and developing countries would grow by 4.2 percent in 2015 and 4.7 percent in 2016. Developed economies, on the other hand, were expected to grow by 2.1 percent in 2015 and 2.4 percent in 2016. 

Please keep in mind, international investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.  These risks are often heightened for investments in emerging markets.

Weekly Focus – Think About It

“I never blame myself when I'm not hitting. I just blame the bat and if it keeps up, I change bats. After all, if I know it isn't my fault that I'm not hitting, how can I get mad at myself?”

--Yogi Berra, Baseball player

Best regards,

Lee R Barczak

President

* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.  However, the value of fund shares is not guaranteed and will fluctuate.

*Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.

* The MSCI EM (Emerging Markets) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the emerging market countries of the Americas, Europe, the Middle East, Africa, and Asia.  The MSCI EM Index consists of the following emerging market country indices: Brazil, Chile, Colombia, Mexico, Peru, Czech Republic, Egypt, Greece, Hungary, Poland, Qatar, Russia, South Africa, Turkey, United Arab Emirates, China, India, Indonesia, Korea, Malaysia, Philippines, Taiwan, and Thailand.

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 Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.

* 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.

Weekly Market Commentary

August 24, 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.

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,

Lee R Barczak

President

* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.  However, the value of fund shares is not guaranteed and will fluctuate.

*Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.

* 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 Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.

* 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.