As back to school season hits and summer comes to a close, don’t forget to stay updated on your portfolio and learn more about important investment and market trends.
Stock Market Outlook
The S&P 500 Index ended the first half of the year at 2,740.30. That places the gain for the S&P 500 at 10.34%. The Total US Stock Market Index, which includes all large cap, mid cap, and small cap stocks, had a first half gain of 10.95%.
Lets review the five major causes of a bear market and see if these indicators are telling us to raise cash now.
Tight money?
No, Federal Reserve policy remains highly accommodating.
Inverted yield curve?
No, the positively sloped yield curve suggests the US economy will maintain moderate growth.
High inflation?
No, the Fed’s forecast for PCE inflation for 2017 is 1.65%.
Rapid growth?
No, we estimate real GDP growth for 2017 between 2.0 & 2.6%.
Overvaluation?
No, 2018 S&P 500 Index operating earnings are estimated at $140. With a PE ratio of 18, this places the S&P 500 Index at a potential of 2,520 going forward. If a corporate tax revision is passed by Congress, these operating earnings will increase 5 to 10%.
The above data significantly supports our view that there is no sign of a recession in the foreseeable future of 6 to 12 months.
Stock Indexes and Suggested Actions
S&P 500 Index Operating Earnings & Potential Going Forward
We have no change to our S&P 500 operating earnings estimates. For 2017 we project earnings to be $130, and $140 for 2018. Our PE ratio range remains at 17.0 to 18.0. This gives an upper level for the S&P 500 Index at 2,340 for 2017 and 2,520 for 2018.
International Stock Market Investing
For the first six months of 2017, the international stock market has grown faster than the US market. VEA, the exchange traded fund for developed markets is up 18.15%. VEU, the exchange traded fund for developed and emerging markets is up 18.72%. VTI, the total US stock market index is up 10.95%.
Recommended Action for Your Stock Portfolio
All portfolios remain fully invested. For additional money going into the stock market, we suggest a dollar cost average approach.
A health restoring market correction would be a favorable occurrence. If we have a correction, the proper action is to hold and wait for it to end. If an investor has stock market cash reserves during a correction, our recommendation is to add that money back into the market in a highly diversified, low-cost, tax-efficient portfolio.
Bond Market Outlook
The first estimate of 2nd quarter GDP (Gross Domestic Product) came in at 2.6%. The final revision to the first quarter GDP was to 1.2%. Therefore, the US economy grew at an average rate of 1.9% for the first half. The trend is encouraging but not impressive. The US economy needs to grow at least at 3% to increase the availability of jobs, increase wages and increase inflation to 2% min.
The Case-Shiller 20 City Composite home price index increased 5.7% year over year in July. This is a positive indicator, but year over year, July car sales were down at all three US major manufacturers.
- GM was down 15.4%
- Ford was down 7.5%
- Fiat Chrysler was down 10%
Federal Reserve
The Federal Reserve Open Market Committee held a two-day meeting on July 25th and 26th. The committee voted to maintain the federal funds rate within the range of 1.00% to 1.25%. Fed Chair Janet Yellen said in her July address to Congress that job gains have averaged 180,000 per month so far this year and is sufficient to provide jobs for new entrants to the workforce.
U.S. Treasuries
US Treasuries are currently paying:
2 Year 1.34%
5 Year 1.84%
10 Year 2.30%
30 Year 2.89%
Interest on treasuries is typically not taxed by states.
Inflation Expectations
The difference between Treasury note, bond yields, and the lower yield on Treasury TIPS of the same maturity can be used as the bond market’s inflation expectations. Below are the current values.
Bond Maturity Inflation Expectation
5 year 1.67%
10 year 1.82%
30 year 1.89%
Inflation, as measured by the Personal Consumption Expenditure, is projected by the Federal Reserve to end 2017 at 1.65%.
Certificates of Deposit
Here are some APY (Annual Percentage Yield) rates on CD’s as paid by TIAA Direct. They can be reached at 855-842-2372
1 Year 1.56% with $1,000
2 Year 1.81% with $1,000
3 Year 2.00% with $1,000
4 Year 2.15% with $1,000
5 Year 2.30% with $1,000
Recommended Action for Your Bond Portfolio
Short, mid, and long-term bond yields are expected to rise over the next couple of years. All individual bonds, bond mutual funds and bond ETFs will lose value if interest rates rise. This is a mathematical fact. One way to avoid this is to own individual bonds and hold them until maturity. The downside of owning individual bonds is the typical 2% brokerage fee to buy them and the buyer must assume the risk the issuer might declare bankruptcy prior to the maturity of the bond.
Long-term bonds will have a greater price change than short-term bonds when interest rates increase. If over time the 10-year Treasury increases in yield from 2.3% to 3.3%, be prepared to lose 10 to 15% in the asset value in a long-term bond or bond fund with a 10 to 15 year average duration.
Right now, our recommendation is to only own short-term or intermediate-term investment-grade corporate bond funds or short-term, high-yield bond funds.
Need help with your portfolio?
Lorenz Financial is ready to help you! Check out our resources page on our website for great finance tips and information, and contact us today to get started on planning your financial future!
Lorenz Financial Services, LLC is a West Lafayette, Indiana fiduciary who offers financial planning and portfolio management services. If you have questions about who we are or our services, please contact us at (765) 532-3295 or email us.