Uploaded byDustin Hall, MBA, CFP®, ChFC®
Half time presentation-Hall & Burns Wealth Management-7 17 14
The document provides a mid-year 2014 market summary and outlook. It reviews market performance in the first half of the year, noting gains in stocks and bonds. It discusses weak economic growth in Q1 and experts wrongly predicting rising interest rates. Areas of focus for the second half include inflation, central bank actions, geopolitical tensions, corporate cash usage, and elections.
More Related Content
Similar to Half time presentation-Hall & Burns Wealth Management-7 17 14
Half time presentation-Hall & Burns Wealth Management-7 17 14
- 1. Half-Time 2014 July 17,2014| Cary, NC
- 2. Today’s Agenda Words We Learned Where WeAre Where We’ve Been What To Watch
- 3.
- 4. Where We’ve Been 2014Performance (through June 30, 2014) • S&P 500 +6% • 10-Year Treasury Yield @ 2.5% • Morgan Stanley Capital International (MSCI) Emerging Markets Index +3.7% • Gold +9.1% • Chicago Board Options Exchange (CBOE) Volatility Index -20%
- 5.
- 6. “Expert’s” Opinion Fed ChiefJanet Yellen on December 18, 2013, forecasted 2014 would be a strong year of positive 2.8 percent to 3.2 percent Gross Domestic Product (GDP) growth with no negative quarters.
- 7. “Expert’s” Opinion Wall Streetanalysts beginning of the year estimates for 2014 appear right on target so far.
- 8. “Expert’s” Opinion • Theexact opposite has occurred as interest rates have sunk following the lackluster economic growth in Q1 • Actual 30-year fixed mortgage rate @ 4% at the end of Q2 Most investment experts predicted a rise in interest rates in 2014. Source: http://www.keepingcurrentmatters.com/wp-content/uploads/2014/01/1.8-Interest-Rate-Projections.jpg
- 9. “Expert’s” Opinion Bill Grosswas one of the few who correctly predicted bonds would strengthen in 2014. • Predicts interest rates won’t rise until 2016, at the earliest. • Says inflation will remain muted and bonds are still attractive.
- 10. Economy Frozen inQ1 Source: http://img2.timeinc.net/ew/i/2013/HMP/Gallery/Frozen.jpg
- 11. Economy Frozen inQ1 Coldest winter in 25 years froze economy in Q1 • Historically, there’s a direct correlation between weather and Q1 economic growth. • Economists, including the Fed, and corporations blame weather for steep drop in economic activity.
- 12.
- 13. 17th Worst Quarter inEconomic History
- 14. 17th Worst Quarterin Economic History Economy shrank by 2.96% in Q1 – are we headed for recession?
- 15. 17th Worst Quarterin Economic History Source: https://pbs.twimg.com/media/BrUwSWsCAAAgc7Z.png
- 16. Fed Stays theCourse
- 17. Fed Stays theCourse Despite weak first quarter, Federal Reserve continues to taper asset purchase program. • However, interest rates remain low because Fed is simply buying less and not necessarily tightening or selling anything. Source: http://b-i.forbesimg.com/beltway/files/2013/06/tapering-is-not-tightening-graph-1-e1372172383367.jpg
- 18. Bull Market RagesForward
- 19. Bull Market RagesForward • The S&P 500 up over 6% through the first half of 2014. • Stocks rallied as investor sentiment improved, Fed policy remains accommodative, and bond yields offer poor risk-reward potential.
- 20. Bull Market RagesForward Source: http://markets.money.cnn.com/cgi-bin/upload.dll/file.png?z048a100az082528c25c4d4b0caab4abf22bd6c70d
- 21.
- 22. Bonds Also RewardingInvestors • Proving many market experts wrong, bonds have continued to rally for the most part in 2014. • Interest rates have declined and corporate bonds have produced favorable returns.
- 23. Bonds Also RewardingInvestors
- 24.
- 25.
- 26. Inflation Federal Reserve stillnot getting the inflation it wants. • However, recent trend is higher and Fed target could soon be hit.
- 27. Inflation Wage inflation remainsstagnant although expectations for future inflation are moving higher.
- 28.
- 29. Housing Slow start forhousing market in 2014. • Pent-up demand resulted in huge demand for new homes in May — highest sales in one month since January 1992.
- 30.
- 31. Automobile Sales • Automakerssold over 1.6 million light vehicles in the United States during the month of May for an annualized pace of 16.7 million. • Highest seasonally adjusted pace in 87 months.
- 32.
- 33.
- 34. Jobs Market Employment continuesto slowly heal. • Economy consistently adding healthy amount of new jobs each month. • 200k+ jobs added for 4 consecutive months – first time since late 1990s.
- 35.
- 36. Stocks Valuation • Stocksare trading at higher valuations than historical averages. • Investors are optimistic corporate earnings will increase. • Low bond yields forcing investors to take on risk for return.
- 37.
- 38. Bond Yield Spreadsare Thin
- 39. Bond Yield Spreadsare Thin • Corporate bond yields offering smallest spread over Treasuries in over a decade. • Investors not getting paid much for potential risk of interest rates rising.
- 40. Bond Yield Spreadsare Thin
- 41.
- 42. Vanishing Volatility • Thelast several years, investors have witnessed excessive turbulence. • Volatility has all but disappeared in 2014.
- 43.
- 44.
- 45.
- 46. What to Watch 1.Inflation 2. Central Banks 3. Geopolitical Tension 4. Use of Corporate Cash 5. Elections
- 47.
- 48. Inflation Who will getit right, Wall St., the Fed, or Us? • Wall Street experts have once again predicted inflation is coming soon alongside a return of strong economic growth. • Federal Reserve believes deflation remains largest risk. • Individuals have the highest forecasted inflation rate.
- 49.
- 50. Inflation • Economists pointto the recent surge in the Consumer Price Index (CPI) and are ratcheting up inflation forecasts for the year. • Fed has dismissed this uptick as temporary.
- 51.
- 52. The way thoseoutside of the financial market see inflation…
- 53.
- 54.
- 55. Central Banks • CentralBanks around the globe aren’t concerned about inflation. • European Central Bank implements Negative Interest Rates.
- 56.
- 57. Central Banks • Quantitativeeasing across the globe still hasn’t changed the fact that economic growth continues to disappoint. • Economists downgrading global GDP growth rates in 2014 similar to 2012 and 2013.
- 58.
- 59.
- 60.
- 61. Geopolitical Tension 2014 hasbeen full of geopolitical tension so far. • Islamic State in Iraq and Syria (ISIS) is the newest headline.
- 62. Russia also stoleheadlines with its annexation of Crimea in Ukraine earlier this year.
- 63.
- 64. Corporate Cash Corporations arefinally unloading their record cash piles. • Mergers and acquisition activity has been enormous in 2014.
- 65. Corporate Cash Stock buybackshave skyrocketed in 2014.
- 66. Corporate Cash Plenty ofdry powder remains for more purchases.
- 67.
- 68. Elections 2014 is abig election year. • A total of 36 U.S. Senate elections. • U.S. government has finally gotten out of the way of the markets this year, but should Republicans gain control of Senate and retain the House, there is likely many initiatives that will be made which could affect financial markets.
- 69.
- 70. Thank You forYour Continued Support! The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Investing is subject to risks including possible loss of principal. 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. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings. Securities and Advisory Services offered through LPL Financial, Member FINRA/SIPC and a Registered Investment Advisor. 5020 Weston Parkway, Suite 105, Cary, NC 27513 Phone: 919-228-6300 Fax: 919-228-6301 www.hallburns.com
Editor's Notes
- #5 http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/ http://money.cnn.com/data/markets/sandp/?iid=C_MT_Index http://money.cnn.com/quote/etf/etf.html?symb=EEM http://money.cnn.com/quote/etf/etf.html?symb=GLD
- #7 http://nypost.com/2014/06/29/hot-market-is-just-a-lot-of-bull/ GDP actually declined by 2.96% in Q1 2014 Missed estimate by approximately 6% – equivalent to about $1 trillion St. Louis Fed CEO James Bullard, “I haven’t been right with a forecast in years.” Fed has now been incorrect with economic forecasts for 16 consecutive quarters
- #8 http://ei.marketwatch.com/Multimedia/2013/12/31/Photos/MG/MW-BR713_yr_end_20131231135203_MG.jpg?uuid=ab689ea4-724c-11e3-aa60-00212803fad6
- #9 https://finance.yahoo.com/rates/ http://www.keepingcurrentmatters.com/wp-content/uploads/2014/01/1.8-Interest-Rate-Projections.jpg
- #10 http://www.zerohedge.com/news/2014-01-09/bill-gross-2014-investment-outlook-all-about-inflation http://ceo.ca/wp-content/uploads/2014/02/bill_gross.top_.jpg
- #11 http://img2.timeinc.net/ew/i/2013/HMP/Gallery/Frozen.jpg
- #12 http://www.361capital.com/wp-content/uploads/2014/02/Chart_8_and_Chart_9_900px.jpg http://img2.timeinc.net/ew/i/2013/HMP/Gallery/Frozen.jpg Despite several economic indicators pointing towards the U.S. economy slowing down considerably to begin the year, investors are beginning to chalk a lot of it up to a bad stretch of cold weather. According to a research piece released by Bank of America, this last January was the coldest in 25 years. Furthermore, the first quarter of a year is particularly sensitive to weather conditions and likely hampered overall activity as the temperatures remain stubbornly low. It’s safe to say given the financial market’s resiliency this year, investors appear to be anticipating most economic softness occurring now is temporary and pent-up demand for many goods and services from consumers and corporations alike will be realized later on this year.
- #13 http://www.361capital.com/wp-content/uploads/2014/02/Chart_8_and_Chart_9_900px.jpg http://img2.timeinc.net/ew/i/2013/HMP/Gallery/Frozen.jpg Despite several economic indicators pointing towards the U.S. economy slowing down considerably to begin the year, investors are beginning to chalk a lot of it up to a bad stretch of cold weather. According to a research piece released by Bank of America, this last January was the coldest in 25 years. Furthermore, the first quarter of a year is particularly sensitive to weather conditions and likely hampered overall activity as the temperatures remain stubbornly low. It’s safe to say given the financial market’s resiliency this year, investors appear to be anticipating most economic softness occurring now is temporary and pent-up demand for many goods and services from consumers and corporations alike will be realized later on this year.
- #15 http://www.thereformedbroker.com/2014/06/29/behold-the-awesome-power-of-financial-twitter/ https://pbs.twimg.com/media/BrN4_S8CQAAM-v8.jpg https://pbs.twimg.com/media/BrUwSWsCAAAgc7Z.png Revisions to the first quarter growth rate of the U.S. economy, as measured by gross domestic product (GDP), were released and investors were stunned with the results. As it turns out, economists are now saying the U.S. economy shrank by an annualized rate of 2.96% in the first quarter. Only 16 times in the entire history of the U.S. economy have we witnessed a worse contraction over a three-month time period. Furthermore, according to the firm J. Lyons Fund Management, there has never been an instance where the U.S. economy has contracted by more than 1.73% in a single quarter and didn’t fall into a recession. Before you panic though, the firm Marginal Idea rebutted this finding by showing the average one-year return of the S&P 500 index following the top 25 worst quarters of economic decline is 16%. Also, the index has seen positive returns 79% of the time one year after the worst quarters of economic growth.
- #16 http://www.thereformedbroker.com/2014/06/29/behold-the-awesome-power-of-financial-twitter/ https://pbs.twimg.com/media/BrN4_S8CQAAM-v8.jpg https://pbs.twimg.com/media/BrUwSWsCAAAgc7Z.png Revisions to the first quarter growth rate of the U.S. economy, as measured by gross domestic product (GDP), were released and investors were stunned with the results. As it turns out, economists are now saying the U.S. economy shrank by an annualized rate of 2.96% in the first quarter. Only 16 times in the entire history of the U.S. economy have we witnessed a worse contraction over a three-month time period. Furthermore, according to the firm J. Lyons Fund Management, there has never been an instance where the U.S. economy has contracted by more than 1.73% in a single quarter and didn’t fall into a recession. Before you panic though, the firm Marginal Idea rebutted this finding by showing the average one-year return of the S&P 500 index following the top 25 worst quarters of economic decline is 16%. Also, the index has seen positive returns 79% of the time one year after the worst quarters of economic growth.
- #18 http://b-i.forbesimg.com/beltway/files/2013/06/tapering-is-not-tightening-graph-1-e1372172383367.jpg http://www.forbes.com/sites/beltway/2013/06/25/is-the-federal-reserve-really-tightening-fed-policy-in-two-charts/ The Federal Reserve has continued down the path of buying fewer assets each month and is expected to continue to do so throughout the year until they are no longer buying additional bonds. However, it’s vital to understand this doesn’t mean the Fed is “tightening” or planning to raise interest rates. The Fed is simply buying less each month but has no intention to sell what they’ve already purchased at this point. The moral of the story is, the Fed will remain highly accommodative to the financial markets. Interest rates will likely remain suppressed until the Fed reverses course. However, this will not happen until economic growth is clearly improved which is not the case yet this year.
- #20 http://markets.money.cnn.com/cgi-bin/upload.dll/file.png?z048a100az082528c25c4d4b0caab4abf22bd6c70d Even though the economy has been weak in 2014 so far, stocks continue to rally. Corporate profits continue to improve but, most importantly, investor sentiment has increased. The Federal Reserve, despite fears of raising rates too soon, remains a tailwind for equities. Also, as the bond market continues to perform well, bond yields are so low investors are forced to take on risk given the unattractive dynamics of other traditionally “safer” investments.
- #21 http://markets.money.cnn.com/cgi-bin/upload.dll/file.png?z048a100az082528c25c4d4b0caab4abf22bd6c70d Even though the economy has been weak in 2014 so far, stocks continue to rally. Corporate profits continue to improve but, most importantly, investor sentiment has increased. The Federal Reserve, despite fears of raising rates too soon, remains a tailwind for equities. Also, as the bond market continues to perform well, bond yields are so low investors are forced to take on risk given the unattractive dynamics of other traditionally “safer” investments.
- #23 http://marketrealist.com/2014/06/corporate-debt-trends-high-yield-investors-enough/ The consensus opinion coming into 2014 was, as the Federal Reserve pumped the brakes on quantitative easing and the economy improved, interest rates had to increase. However, the opposite continues to occur. The economy produced one of the worst growth rates in history to begin 2014 and bonds have performed well as interest rates remain suppressed. Even considering the high growth of stocks since 2009, high yield bonds have actually still outperformed stocks, on average, from the beginning of 2008 through the middle of June.
- #24 http://marketrealist.com/2014/06/corporate-debt-trends-high-yield-investors-enough/ The consensus opinion coming into 2014 was, as the Federal Reserve pumped the brakes on quantitative easing and the economy improved, interest rates had to increase. However, the opposite continues to occur. The economy produced one of the worst growth rates in history to begin 2014 and bonds have performed well as interest rates remain suppressed. Even considering the high growth of stocks since 2009, high yield bonds have actually still outperformed stocks, on average, from the beginning of 2008 through the middle of June.
- #27 http://blogs.wsj.com/economics/category/inflation/ http://s.wsj.net/public/resources/images/BN-DL016_pce062_E_20140626101720.jpg One of the main reasons interest rates remain low and bonds continue to perform well is inflation is still very low. The Federal Reserve would like to see inflation reach 2% but, for the last several years, their measure of inflation has trended well below. Until this measure of inflation sustainably remains above 2%, expect the Federal Reserve to remain accommodative with their monetary policy.
- #28 http://bambooinnovator.files.wordpress.com/2014/06/image001-136.jpg?w=630&h=452 Sustainable inflation can’t be achieved until Americans have larger paychecks. Although employment has improved, wages haven’t increased much at all after the recession. Expectations are for this to change over the next 12 months, according to a survey of chief financial officers. But, until we actually begin to see American households bringing home more money to spend, it’s hard to envision how economic growth can accelerate.
- #30 http://www.bloomberg.com/news/2014-06-24/sales-of-new-u-s-homes-surged-in-may-to-highest-since-2008.html Home sales are a key indicator of the health of the U.S. economy. When the housing market crashed in many parts of the country in 2007-2009, it had a large impact on the financial crisis. Since many people had borrowed against the rising value of their homes leading up to the collapse, it caused a lot of pain to many homeowners. Unfortunately, Americans, on average, have a large amount of their net worth tied up in their homes. A rebound in the housing market, therefore, would be a very positive sign for the U.S. economy.
- #32 http://wardsauto.com/datasheet/us-light-vehicle-sales-summary-may-2014 http://wardsauto.com/site-files/wardsauto.com/files/datasheets/thumbnails/USSales1405_0.png?1401824139 The U.S. consumer is also showing considerable strength in the automobile sector. Light vehicle sales had an outstanding month in May reaching an 87-month high seasonally adjusted annual rate of 16.7 million automobiles sold. Strong demand for high-ticket items is typically a good sign for the health of the U.S. economy which is driven mostly by consumer expenditures.
- #33 http://wardsauto.com/datasheet/us-light-vehicle-sales-summary-may-2014 http://wardsauto.com/site-files/wardsauto.com/files/datasheets/thumbnails/USSales1405_0.png?1401824139 The U.S. consumer is also showing considerable strength in the automobile sector. Light vehicle sales had an outstanding month in May reaching an 87-month high seasonally adjusted annual rate of 16.7 million automobiles sold. Strong demand for high-ticket items is typically a good sign for the health of the U.S. economy which is driven mostly by consumer expenditures.
- #35 http://blog.parkerlynch.com/finance-jobs-reports/finance-jobs-report-june-2014/ http://blog.parkerlynch.com/wp-content/uploads/2014/06/PL_June_chart.png http://online.wsj.com/articles/u-s-adds-217-000-jobs-unemployment-rate-steady-at-6-3-1402058042 Nobody is claiming the U.S. jobs market is outstanding, but there has been consistent, gradual improvement. For the first time since the boom times of the late 1990s, we saw four consecutive months of 200,000 or more new jobs added. The unemployment rate is at 6.3% but other estimates, that include the people who have given up looking for work, have it much higher. Regardless, while the job market is far from perfect, the overall momentum has been moving positive.
- #37 http://blogs.marketwatch.com/thetell/2014/06/23/goldman-sachs-15-cheap-stocks-for-an-expensive-market/ http://s.wsj.net/public/resources/MWimages/MW-CJ262_pe_val_ME_20140623142212.jpg Stocks have obviously had a tremendous run from the depths of the recession in March 2009. The forward P/E ratio (price to forward 12 months earnings estimates) is currently at around 16.0. The 5-, 10-, and 35-year average is around 13-14, so stocks do trade at a higher than normal price tag for expected earnings. Investors must feel optimistic corporate earnings growth will accelerate in order to justify these prices. Furthermore, there’s not much else to invest in with bonds offering dangerously low yields combined with the threat of potential inflation should the economy ever begin growing at an above average pace again.
- #38 http://blogs.marketwatch.com/thetell/2014/06/23/goldman-sachs-15-cheap-stocks-for-an-expensive-market/ http://s.wsj.net/public/resources/MWimages/MW-CJ262_pe_val_ME_20140623142212.jpg Stocks have obviously had a tremendous run from the depths of the recession in March 2009. The forward P/E ratio (price to forward 12 months earnings estimates) is currently at around 16.0. The 5, 10, and 35 year average is around 13-14, so stocks do trade at a higher than normal price tag for expected earnings. Investors must feel optimistic that corporate earnings growth will accelerate in order to justify these prices. Furthermore, there’s not much else to invest in with bonds offering dangerously low yields, combined with the threat of potential inflation should the economy ever begin growing at an above average pace again.
- #40 http://online.wsj.com/articles/heard-on-the-street-spreading-unease-in-corporate-bond-markets-1404067822 http://si.wsj.net/public/resources/images/MI-CD698_SPREAD_G_20140629174504.jpg Coming into the year, more people believed this would be another year where owning bonds would be a bad idea. The economy was supposed to accelerate, the Fed was supposed to peel back stimulus at a fast pace, and interest rates were supposed to rise. None of this has happened. Interest rates are actually lower than where they began the year, yield spreads (or the amount you pay for corporate debt over government debt) have tightened, and prices of investment grade corporate debt have advanced at a similar pace to the S&P 500. Once again, however, more people are sounding alarm that bonds are dangerous investments because the economy could improve faster than we expect, and interest rates may rise quickly, resulting in severe losses to bond portfolios. Whether or not that theory proves true relies on the health of the economy and the direction of interest rates. While it would make sense that they would eventually begin to rise, many have made this prediction for several years in a row, and have been wrong.
- #41 http://online.wsj.com/articles/heard-on-the-street-spreading-unease-in-corporate-bond-markets-1404067822 http://si.wsj.net/public/resources/images/MI-CD698_SPREAD_G_20140629174504.jpg Coming into the year, more people believed this would be another year where owning bonds would be a bad idea. The economy was supposed to accelerate, the Fed was supposed to peel back stimulus at a fast pace, and interest rates were supposed to rise. None of this has happened. Interest rates are actually lower than where they began the year, yield spreads (or the amount you pay for corporate debt over government debt) have tightened, and prices of investment grade corporate debt have advanced at a similar pace to the S&P 500. Once again, however, more people are sounding alarm that bonds are dangerous investments because the economy could improve faster than we expect, and interest rates may rise quickly, resulting in severe losses to bond portfolios. Whether or not that theory proves true relies on the health of the economy and the direction of interest rates. While it would make sense they would eventually begin to rise, many have made this prediction for several years in a row and have been wrong.
- #43 http://si.wsj.net/public/resources/images/MI-CD598_VIX_G_20140623153328.jpg The markets have been plagued with volatility since the last recession. Uncertainty was rampant as investors were confronted with unprecedented activity. Things have since calmed down, sending volatility indices plummeting. Now, some skeptics are saying complacency is a new risk in the markets. But, you can’t have it both ways; volatility is either a risk or it’s not. When people were complaining about excessive volatility in the markets post-recession, everyone hoped for exactly what we’ve received… a dose of calm and more normal trading behavior.
- #44 http://si.wsj.net/public/resources/images/MI-CD598_VIX_G_20140623153328.jpg The markets have been plagued with volatility since the last recession. Uncertainty was rampant as investors were confronted with unprecedented activity. Things have since calmed down, sending volatility indices plummeting. Now, some skeptics are saying complacency is a new risk in the markets. But, you can’t have it both ways; volatility is either a risk or it’s not. When people were complaining about excessive volatility in the markets post-recession, everyone hoped for exactly what we’ve received… a dose of calm and more normal trading behavior.
- #45 https://www.youtube.com/watch?v=0n2iE3FikJ0#t=64 Investors can take some tips from this Father of the Year candidate. Often times, the financial markets offer up more noise than we can handle and we become distracted after we lose our patience. However, this man proves that if he can get through his Saturday mornings, we as an investment community also should be fully capable of avoiding making costly mistakes by reacting to the “noise” around us.
- #49 http://www.businessinsider.com/inflation-wall-street-vs-the-fed-2014-6 http://1.bp.blogspot.com/-ePrOjzrVKdY/UvlnjNcUCTI/AAAAAAAALXs/qds-Ikvkc10/s400/Inflation+forecasts.JPG Inflation conversations and debates will likely dominate the rest of 2014. It’s the key determinant on where the financial markets move next. If the economy begins to advance at a sustainably fast pace (defined as 3% or above), then inflation will likely also follow suit resulting in bond prices moving precipitously lower and assets moving out of that space. However, if these predictions are incorrect, as the Fed believes they will be, at least for the rest of the year, then stocks could potentially disappoint and bonds could once again shine bright.
- #50 http://www.businessinsider.com/inflation-wall-street-vs-the-fed-2014-6 http://1.bp.blogspot.com/-ePrOjzrVKdY/UvlnjNcUCTI/AAAAAAAALXs/qds-Ikvkc10/s400/Inflation+forecasts.JPG Inflation conversations and debates will likely dominate the rest of 2014. It’s the key determinant on where the financial markets move next. If the economy begins to advance at a sustainably fast pace (defined as 3% or above), then inflation will likely also follow suit resulting in bond prices moving precipitously lower and assets moving out of that space. However, if these predictions are incorrect, as the Fed believes they will be, at least for the rest of the year, then stocks could potentially disappoint and bonds could once again shine bright.
- #51 http://www.mylsb.com/blog/investments/bond-market-perspectives--week-of-june-23-2014.aspx The previous slide showed economists (Wall Street) have slightly higher estimates for inflation than the Federal Reserve. This is because the Consumer Price Index has accelerated sharply recently. Only time will tell whether the Fed is right in their thinking or if inflation is truly starting to finally surface. It’s worth noting the Fed follows a different measure of inflation, the PCE index – or Personal Consumption Expenditures – and this measure is showing much more muted inflation at this time.
- #52 http://www.mylsb.com/blog/investments/bond-market-perspectives--week-of-june-23-2014.aspx The previous slide showed economists (Wall Street) have slightly higher estimates for inflation than the Federal Reserve. This is because the Consumer Price Index has accelerated sharply recently. Only time will tell whether the Fed is right in their thinking or if inflation is truly starting to finally surface. It’s worth noting the Fed follows a different measure of inflation, the PCE index – or Personal Consumption Expenditures – and this measure is showing much more muted inflation at this time.
- #53 https://theinvestmentinsight.files.wordpress.com/2011/01/inflation-cartoon.jpg Everyday people believe inflation is much higher than market experts because the prices for everyday items have gone up, while the prices of other discretionary items have declined. This averages out to not much inflation, but disproportionately attacks the lower and middle class because the essential items such as food, child care, health care, and college represent a much larger percentage of their disposable income.
- #54 http://usdemocrazy.net/wp-content/uploads/2014/05/Screen-Shot-2014-05-01-at-2.38.45-PM.png
- #56 http://blogs.wsj.com/moneybeat/2014/06/05/european-central-bank-rates-and-policy-decision-live/ http://si.wsj.net/public/resources/images/OG-AB565_ECB_1_E_20140605080648.jpg In an historic move, the European Central Bank actually implemented negative deposit rates for financial institutions this year. Leaders of the Euro Zone are so concerned about deflation and the lack of economic growth, they’re actually raising their incentives for banks to increase lending and for assets to move into more risky areas of the financial market. One can look at this scenario and think it’s a great sign because Central Banks are continuing to aid economic growth or be frightened by the amount of intervention that is still occurring in the capital markets. Whatever your opinion might be, so far the markets continue to react positively – both bonds and stocks – each time these types of announcements are made.
- #57 http://blogs.wsj.com/moneybeat/2014/06/05/european-central-bank-rates-and-policy-decision-live/ http://si.wsj.net/public/resources/images/OG-AB565_ECB_1_E_20140605080648.jpg In an historic move, the European Central Bank actually implemented negative deposit rates for financial institutions this year. Leaders of the Euro Zone are so concerned about deflation and the lack of economic growth, they’re actually raising their incentives for banks to increase lending and for assets to move into more risky areas of the financial market. One can look at this scenario and think it’s a great sign because Central Banks are continuing to aid economic growth or be frightened by the amount of intervention that is still occurring in the capital markets. Whatever your opinion might be, so far the markets continue to react positively – both bonds and stocks – each time these types of announcements are made.
- #58 http://www.alhambrapartners.com/wp-content/uploads/2014/06/ABOOK-June-2014-World-Bank-Global-GDP.jpg http://www.alhambrapartners.com/2014/06/11/the-real-economy-does-not-have-the-floor-assumed-by-forecasts/ Have we all been fooled once again into thinking economic growth would finally happen this year? Similar to 2012 and 2013, 2014 appears to be set-up to be yet another 12 months where economic growth disappoints. At this point, what should we fear the most? Should we be afraid of Central Bank money printing to actually work and create too much inflation? Or, should we actually be more afraid it doesn’t work and the economy is not prepared to resume growing at a normal pace and may even continue to decline? And, with interest rates already at or near 0% around the world, what ammunition do we have left to combat this lack of growth should this indeed prove to be the truth?
- #59 http://www.alhambrapartners.com/wp-content/uploads/2014/06/ABOOK-June-2014-World-Bank-Global-GDP.jpg http://www.alhambrapartners.com/2014/06/11/the-real-economy-does-not-have-the-floor-assumed-by-forecasts/ Have we all been fooled once again into thinking economic growth would finally happen this year? Similar to 2012 and 2013, 2014 appears to be set-up to be yet another 12 months where economic growth disappoints. At this point, what should we fear the most? Should we be afraid of Central Bank money printing to actually work and create too much inflation? Or, should we actually be more afraid it doesn’t work and the economy is not prepared to resume growing at a normal pace and may even continue to decline? And, with interest rates already at or near 0% around the world, what ammunition do we have left to combat this lack of growth should this indeed prove to be the truth?
- #60 http://edponsi.com/quantitative-easing/ A joke on the reality Central Bankers don’t even know what will happen as a result of their massive quantitative easing programs because they’ve never been implemented to this extent. It could prove to spark massive inflation, might not do anything, or could work exactly as they hope. However, the fact of the matter is that at this point… nobody knows.
- #62 http://www.nydailynews.com/news/world/al-qaeda-inspired-isis-militants-world-richest-terror-group-looting-half-billion-iraq-bank-report-article-1.1828661 http://assets.nydailynews.com/polopoly_fs/1.1828185.1402628103!/img/httpImage/image.jpg_gen/derivatives/article_970/iraq-map.jpg?enlarged Turmoil has hit many areas of the globe so far in 2014, disrupting the financial markets for weeks at a time. The most recent example is the ISIS organization that has moved throughout Iraq and Syria, disrupting the existing government. This particular instance has roiled the global price of oil and has raised eyebrows due to the U.S. government’s recent history with this region. So far, the United States has chosen to stay uninvolved with military conflicts overseas for the most part. However, if this were to change, and the U.S. military were to enter into a sustained conflict, we would expect this to have a big impact on financial markets.
- #63 https://pbs.twimg.com/media/BiOJuc8CYAA375E.jpg Interestingly, the Russia-Ukraine standoff all of a sudden doesn’t seem as a big of a deal after the recent happenings in Iraq. This proves that many of the initial shock from geopolitical tension proves to be temporary, but it remains a risk nonetheless. There have certainly been instances so far this year when financial markets were at least temporarily roiled by conflict overseas, and it remains a key area of focus for Wall Street on an everyday basis.
- #65 http://i2.cdn.turner.com/money/dam/assets/140616140531-us-mergers-acquisitions-620xa.jpg We knew it was a matter of time before the record amount of cash on corporate balance sheets would begin to be deployed and, now so far in 2014, we’re finally seeing it happen. One place this has especially taken place in 2014 is mergers and acquisitions. Companies have already completed over $780 billion worth of deals this year, dwarfing the previous six years and already nearing the entire 2007 total of $880 billion. This has been a major source of support for stock prices so far this year and could continue to provide a tailwind into the future.
- #66 http://www.zerohedge.com/news/2014-05-27/here-mystery-and-completely-indiscriminate-buyer-stocks-first-quarter http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2014/05/Stock%20Buybacks%20quarterly_0.jpg Some of the largest purchasers of stocks have been the actual companies so far this year. In the first quarter of 2014 alone, companies in the S&P 500 purchased $160 billion worth of their own shares. The last 12 months, including Q2 2014, is projected to be the greatest 12 months of share buybacks ever.
- #67 http://www.factset.com/insight/2014/6/cashinvestment_6.24.14#.U7HrLZRdWSo http://www.factset.com/insight/2014/6/resolveuid/a2879f31-1dfc-4058-aab4-9a628b6cc7d4 While corporate cash piles did finally decline from all the spending in the first part of 2014, the pile remains stacked high. This amount of dry powder could continue to provide a source of fuel for markets as companies continue to invest in companies, new projects, initiate dividends, buyback shares, and, maybe, even raise wages for their employees!
- #69 http://ballotpedia.org/United_States_Congress_elections,_2014 There are six seats needed by Republicans to gain control of the Senate and early indications suggest this may be possible. Should the Republicans gain control of the Senate, and retain control of the House, we expect that to have an impact on the markets.
- #70 http://ballotpedia.org/United_States_Congress_elections,_2014 There are six seats needed by Republicans to gain control of the Senate and early indications suggest this may be possible. Should the Republicans gain control of the Senate, and retain control of the House, we expect that to have an impact on the markets.