“The Internet is just a world passing around notes in a classroom.”[i]

It is remarkable that smartphones and tablets allow their users to access virtually anything ever written in seconds.  Having this instantaneous access to news or any other piece of information is supposed to be a good thing.  To be sure, getting headlines while standing in line at Starbucks is considered productive and reading about who played well in the Jets training camp scrimmage as you are waiting for a happy hour beverage is invaluable.  However, as convenient and industrious as this is, we check the “undecided” box in regard to the total usefulness.

This reluctance in the belief that having unlimited information at your fingertips is beneficial is not a Luddite yearning for the good ole days.  Rather it is the fear that blogs and social media sites are viewed with more creditability than they deserve which can then lead to a distorted view of reality.  We think the risk of this misinformation is especially high when it involves financial news and data.

 

No one enjoys the convenience of accessing stock prices more than we do and using various apps to stay on top of the market is vital.  Nevertheless, we think many mistake instant access to prices and news for analysis and as a result have a misperception of the markets.  As an example, recent client meetings have included a fair amount of surprise when they were told the Dow Jones Industrial Average was only up 1.5% in 2014’s first six months.  The incredulity increased when we pointed out that as recently as May the Russell and Nasdaq Composite were negative year-to-date.  The Russell remains slightly lower for 2014 which would probably win a few trivia bets.  For the record, here is where the major averages stand as of the end of last week.

 

2014 YTD[ii]

                                   

Dow Jones Industrial Average    +2.6%
S&P 500                                       +7.6%
Nasdaq Composite                     +8.7%

 

Russell 2000                                 -0.3%

 

Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends

 

There is no doubting that the S&P and Nasdaq have a good 2014.  The former has had a much smoother trip in contrast to the latter’s multiple journeys into negative territory and explosive spike from the May lows.   The eye openers are the Russell’s break-even year and the Dow’s “meager” gains.  Many are stunned to hear that the Dow is only up a couple of percent given that seemingly every day’s headlines include “all-time highs for the stock market”.

 

The Dow began the year at a record so naturally any move higher from that level produces another record.  In the job of being read, journalists realize that reporting blue chips advanced 5 points doesn’t have the same appeal as a “New Stock Market Record” headline does.  So we get the juicer version.  And with the repetition of this news that we have seen in 2014, it’s no wonder that investors are surprised when they look at the Dow’s YTD returns.

 

Of course we must consider the possibility of a widespread distrust of Wall Street and consequently people don’t care.  To this end, a recent Wells Fargo /Gallup Investor and Retirement Optimism survey reveals some helpful results.  When asked during late June and early July only 64% of respondents (1,000 U.S. investors with at least $10,000 invested were polled.) realized that the stock market was up in 2013.  Further only 7% knew that the S&P 500 was up over 30% last year.  And when asked their preference on where to put new investment funds, only 41% would choose stocks.[i]

 

While this clearly demonstrates a pessimistic public, it could also be viewed as a pipeline of future buyers if they somehow have a change of heart.  Admittedly that isn’t so easy to imagine.  With increasing tension surrounding the multiple geopolitical issues, it is hard to throw caution to the wind.  Also, in an ironic twist, European economies (lead by Germany and France) are feeling the effects of the Russian sanctions and are close to slipping into a recession.  And finally, the Federal Reserve has been reducing stimulus and will continue to move in that direction.

 

Sometimes figuring out why the market goes higher is not easy.  With

the above list in mind, the current rally qualifies.  As bombs are flying and governments crumbling, stocks have moved higher.  The average S&P 500 is up 4% from the August 7th lows to the last week’s close.

 

Declining jobless claims is one driver of the move.  Recently the weekly claims report fell to 279,000 claims which is the lowest number since before the financial crisis.  The four-week moving average has moved down to the 300,000 level again the lowest since 2007.

Second quarter earnings have also helped stocks.  The S&P 500 companies’ quarterly earnings growth year-over-year will be around 9.6%.  Furthermore, profit margins (operating) remain in the high single digit to low double digit range.

 

As confounding as the stock market is, it can’t hold a candle to the fixed income market. The 10-year Treasury yield began the year at 3% with everyone predicting a move higher.  A combination of a growing economy and the Fed’s “taper” would certainly push interest rates much higher in 2014.  Last week the note’s yield closed at 2.40%.  Many reasons are offered for this unexpected move lower including a flight to safety given the geopolitical conflicts as well as a shortage of Treasury bonds.  This last point is hard to conceive – how can a government with fiscal deficits as large as the U.S.’s have a dearth of bonds.  We must remember that the Fed through its QE has been buying billions of dollars of these bonds each month.  Institutions who need to offset their liabilities with high quality fixed income investments have had to bid these securities higher (lower interest rates).

On the other hand, the high yield sector of the fixed income market has seen carnage.  From late June through July, the high yield exchange traded fund (HYG) suffered a 3.14% decline.  This is equivalent to over two-thirds of the fund’s annual yield of 4.25%.  It’s hard to make up 66% of your expected yield.  To make matters worse, investors pulled $361 million or 3% of the assets in one day at the end of July.  This is a significant move to a more conservative approach and could spread to other parts of the capital markets including equities.  For now it seems contained as the higher quality parts of the corporate bond market (investment grade) did not encounter the same selling.

 

As summer unfortunately winds down we look to the last four months of 2014.  Whether the start of fall increases public’s focus on the stock market is hard to predict.  We would expect the cross currents surrounding the global conflicts to impact investor’s perception of risk.  On the other hand, corporate earnings will likely be the counter balance to those events as it appears the U.S. economy is strengthening.  Oh if there was only an app that reconciled this battle.

 

[i] Raymond James, August 13, 2014

[i] Jon Stewart, “The Daily  Show”

[ii] The Wall Street Journal, August 23, 2014

 

Jeffrey Kerr is a Registered Representative of and securities are offered through LaSalle St. Securities LLC, member FINRA/SIPC. Mr. Kerr is an Investment Advisor Representative of and advisory services are offered through Kildare Asset Management, a Registered Investment Advisor. Kerr Financial Group and Kildare Asset Management are not affiliated with LaSalle St. Securities LLC.

This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. The Russell 2000 Index is an unmanaged market-capitalization weighted index measuring the performance of the 2,000 smallest U.S. companies, on a market capitalization basis, in the Russell 3000 index. It is not possible to invest directly in an index. Investing involves risks, including the risk of principal loss. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. If assistance is needed, the reader is advised to engage the services of a competent professional.

 

Past performance does not guarantee future results

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