April 17, 2017 – DJIA = 20,453 – S&P 500 = 2,328 – Nasdaq = 5,805
“Let Me Hear Your Balalaikas Ringing Out Come and Keep Your Comrade Warm”[i]
The history of Russia spans over 1,100 years. As expected with anything that has this longevity, it’s not been a smooth journey. They have been responsible for historic cultural advancements in art, literature, architecture, and science. Unfortunately, the lows include revolution, conquest, corruption, oppression, world wars, and cold wars.
Surrounding the U.S. presidential election, Russia became the target of the Democrats’ disdain as they were blamed for Hillary Clinton’s defeat. The election was close in many key states so anything that swayed votes influenced the outcome. However, without giving a pass to Boris and Natasha, there are many other scapegoats with several being internal.
Of course, more recently, the list of Russian detractors includes Team Trump which was originally criticized for allegedly being aligned with Moscow. After Nikki Haley’s United Nations tongue lashing and President Trump’s decision to bomb Syria, it’s safe to assume there are not any White House dinner invitations addressed to Vladimir Putin. Or vis-a-versa.
Global tensions have risen which is causing some unexpected coalitions. President Trump has back-peddled a bit on the campaign rhetoric concerning China. Given Chinese influence over North Korea, issues such currency manipulation and trade imbalances were not on the agenda when Chinese President Xi recently met with Mr. Trump.
Unexpectedly, headlines about Syria, Russia, North Korea, ISIS, and other geopolitical problems have not derailed the stock market. Admittedly, the major averages have pulled back from the records reached at the beginning of March. But most would have anticipated much lower prices after the news of bombs in the Middle East together with the unstable Kim Jong-un testing nuclear missiles. Instead, the 2017 version of the U.S markets take this news in stride. Whether this is whistling past the graveyard is unknown. Here are where the major indexes are year-to-date.
2017 YTD
Dow Jones Industrial Average +3.5%
S&P 500 +4.0%
Nasdaq Composite +7.8%
Russell 2000 -0.9%
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividend.
A couple of noteworthy nuggets from the current market landscape. We draw your attention to the numbers above to highlight that the Russell 2000 finished last week lower for 2017. As a reminder, the Russell 2000 was the best performing index in 2016 and was especially strong after the election.
On the other hand, the Nasdaq is the strongest of the major indexes through the first 3 ½ months. Returning to 2016, this was the weakest of the bunch after the election as investors were convinced that Trump’s immigration restrictions would be an obstacle to technology related businesses.
Combining these two reversals, this could represent a rotation from small caps (Russell 2000) to technology (Nasdaq). It could also be a correction of the solid 2016 gains for the Russell. Once again, this reminds us that past performance is no assurance of future results.
A common commandment at the start of 2017 was that interest rates would be moving higher. Indeed, the 10-year Treasury yield, which closed 2016 at 2.43%, rose to 2.61% in March. Since then, however, bond yields have fallen. The 10-year finished last week back at 2.23%.
This surprising rally for the bond market (lower yields = higher bond prices) is partially caused by the lowering of 1st quarter GDP estimates, delays in tax reform and regulation cutbacks, and lower inflation. And let’s not forget that the U.S. Treasury market is viewed as a safe haven. With bombs falling and international tensions high, it makes sense that some global capital flows to U.S. government debt.
Another explanation might be that this move lower in bond yields is a function of how one sided the market had become. After the election, investors believed that the economic growth would pick-up driven by reduced regulations and increased infrastructure spending. These additional fiscal programs would be theoretically financed by higher government deficits. Higher yields would be required to entice buyers of these newly issued bonds.
The result was a crowded investment. Markets are the summation of investor opinions. If everyone believes that rates were going higher, prices reflect this. If the market becomes too one-sided, in this case everyone bearish bonds, there are fewer and fewer sellers. Once the sellers exhaust themselves, the market has to move the other way in order to regain balance.
A final point on the fixed income market. At the same time that longer term interest rates are falling (10- year and 30-year bonds), the Federal Reserve is raising the short maturity rates (federal funds). This flattening of the yield curve is often a sign of a sluggish economy. This is case, however, it might be the necessary rebalancing of the bond market which includes the punishing of the bond bears.
The capital markets have had a lot to digest recently. And there more on the way – French elections this weekend, British elections in early June, first quarter earnings, and the steady stream of presidential tweets. Of course, the geopolitical landscape can throw in a knuckleball any time.
It is a bullish sign that the global markets have navigated the recent cross currents without a more prominent pullback. Nevertheless, this remains a highly-valued market facing a lot of uncertainties. This skinny margin of safety won’t be problem as long the economy expands, the Fed doesn’t raise interest rates too fast, France stays in the EU, the fleet of U.S. aircraft carriers can cover all international calamities, Congress accomplishes something, Amazon becomes the only retailer left, and the New York Jets don’t do anything too stupid in next week’s NFL draft. That’s not too much to ask for!
And I could tell the wise men from the fools
/0 Comments/in Financial Planning News /by spowell“How Do You Measure Yourself with Other Golfers? By Height.[ii]
/0 Comments/in Financial Planning News /by spowellSome interesting data related to this debate is that the St. Louis Federal Reserve released business loan numbers recently. Commercial and industrial loan (C&I) growth has been stagnate over the past 7 months at just under $2.1 trillion. As a point of reference, C&I loans grew 49% from 2012 to 2016.[iv] A strong, expanding economy should be generating increasing loan demand.
[i] Hedgeye.com, June 14, 2017
“I Think I Can, I Think I Can…”
/0 Comments/in Financial Planning News /by spowellNasdaq Composite -2.3%
Too Much of Everything is Just Enough
/0 Comments/in Financial Planning News /by spowellWe’re on the Road to Nowhere
/0 Comments/in Financial Planning News /by spowellS&P 500 +2.7%
Nasdaq Composite -2.7%
Balancing risk and reward Looking for yield without too much risk
/0 Comments/in Financial Planning News /by spowellFranklin 2.12% 1.4 years $100.14 – 1.57%
Balancing risk and reward Looking for yield without too much risk
/0 Comments/in Financial Planning News /by spowellAn important consideration when investing in bonds and fixed income securities is that there are two typical kinds of risk. Credit risk is the possibility that you won’t get your principle paid back. Interest rate risk is the opportunity cost that interest rates move higher while you are invested in a lower yielding instrument.
When dealing with credit risk, you normally receive a higher interest rate to compensate for the higher probability of not getting your investment back. Credit risk can be avoided by buying treasury bonds and bills. Of course the yields of today’s government securities are not very exciting.
Interest rate risk is buying a bond or CD with a set rate and having yields subsequently move higher. For example, buying a CD paying a 4% interest rate and then having the same maturity move to 4.5% while you are receiving 4%.
Interest rates are expected to move higher over the next several years. If that happens (its far from certain), investing in safer things like CD’s and bonds will be tricky. It will re-introduce interest rate risk to the market for the first time in 35 years (Interest rates have been falling since 1982).
As a way to educate investors, we have constructed some options to consider. Please know that this is not a comprehensive list and there are many more options available. These are used to illustrate the state of the market. Further this is not a recommendation as they may or may not be appropriate.
The table includes the yield, the duration, and the 3-year range for the price. Duration, for those who are not familiar with the term, is the time-weighted average of the security’s cash flows. The higher the number the greater the sensitivity to changes in interest rates. In other words, high duration bonds will go down in price more than low duration bonds given the same interest rate move.
The 3-year price range is provided to offer a sense of price volatility. Bond prices move inversely to the move in interest rates.
This table emphasizes price stability or low interest rate risk. We try to help readers understand what yields are available for the lowest interest rate risk. Some of these examples do not have credit risk (CD’s and TIPS) but some others do.
Yield Duration 3 year price Variance from mid-pt.
CD’s 1% 6 months
Franklin 2.12% 1.4 years $100.14 – 1.57%
Liberty Short $97.04
Duration US
Govt ETF
Fidelity Adv 1.63% 2.6 years $11.62 – 1.18%
Ltd. Term $11.35
Bond Fd
Lord Abbett 2.05% 2 years $4.56 – 3.28%
Short Duration $4.27
Income Fund
Putnam 6.03% 1.1 years $8.05 – 11.42%
Diversified $6.40
Income Fund
Vangurad Short -0.25% 2.8 years $52.12 – 4.31%
Term TIP ETF $47.81
Nuveen NY 3.89% 7.3 years $14.89 – 7.16%
Tax Freed $12.90
DoubleLine 0.62% 0.2 years $10.02 – 0.10%
Ultra Short $10.00
Bong Fund
For more information or questions, please contact me.
Jeffrey J. Kerr, CFA
Kerr Financial Group
Kildare Asset Management
130 Riverside Drive
Binghamton, NY 13905
Let Me Hear Your Balalaikas Ringing Out Come and Keep Your Comrade Warm
/0 Comments/in Financial Planning News /by spowellIt is a bullish sign that the global markets have navigated the recent cross currents without a more prominent pullback. Nevertheless, this remains a highly-valued market facing a lot of uncertainties. This skinny margin of safety won’t be problem as long the economy expands, the Fed doesn’t raise interest rates too fast, France stays in the EU, the fleet of U.S. aircraft carriers can cover all international calamities, Congress accomplishes something, Amazon becomes the only retailer left, and the New York Jets don’t do anything too stupid in next week’s NFL draft. That’s not too much to ask for!
016 4th qtr-year end Kildare Asset Mgt-Kerr Financial Group client review letter
/0 Comments/in Financial Planning News /by spowellUsing a size weighted average, here is how the average Kildare Asset Management-Kerr Financial Group client’s account performed. This is calculated after all fees and expenses.
2016 Election to year end
March Madness – April Absurdity. “Curiouser and Curiouser”
/0 Comments/in Financial Planning News /by spowell