Summer can be a pretty busy time with family vacations, lawn and garden work, and enjoying the great outdoors. With everything going on, it’s important that you don’t forget to stay updated on your investment portfolio. Here are a few things to keep in mind as we kick off the summer season.
Stock Market Outlook
As always, we do not try to predict stock market corrections of -10% to -20%. These are short-lived events, and our recommendation is to just hold while the market recovers.
We do try and predict stock market BEAR markets. These are downturns of -20% and greater. What is the most frequent cause of a bear market? A recession. Is there a recession on the horizon? No, see the data below.
Is inflation accelerating? No, and this is a good thing.
A popular inflation gauge is the personal consumption expenditure (PCE), which measures prices changes of consumer goods and services. Over the past year, the PCE price index has increased 1.7% and the PCE core price index has risen only 1.5%, indicating a healthy economy.
Are payrolls growing? Yes, but they are growing slowing, and this is a good thing.
During the first four months of 2017, payroll gains have averaged 185,000, the same as one year ago. The unemployment rate declined to 4.4%, the lowest level since May 2007.
Are unemployment claims rising? No, and this is a good thing.
The trend of new unemployment claims has been highly favorable for the past two years, and the most recent data continues to place the key four-week moving average of new claims very close to historic lows at 235,250. This is the lowest level for the four-week moving average since April 1973!
Is the yield curve inverted? No, and this is a good thing.
During periods when the yield curve shows an upward slope, the risk of recession is very low. As of now, the yield curve continues to maintain an upward slope. In our view, this positive rate slope is supportive of continued economic growth.
Are leading economic indicators pointing down? No, and this is a good thing.
The Conference Board’s Leading Economic Index (LEI), which gauges future economic growth, rose 0.3% in April as eight of the 10 components made positive contributions. Over the last six months, the LEI has increased 2.4%, which is well above the growth of 0.7% in the previous six months.
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
Very soon investors will begin to focus on 2018 S&P 500 corporate operating earnings. Our current estimate is $140 per share. With a price-earnings (PE) ratio range of 17 to 18, the potential going forward for the S&P 500 Index is 2380 to 2520. On June 2, 2017, the index closed at an all time high of 2439.
International Stock Market Investing
Year to date, the international stock market has grown faster than the U.S .market. The VTI, the total U.S. stock market index, has increased 9.24% year to date as of June 2. The EFA, the broad international stock market index, has increased 16.44% during the same time period.
Recommended Action for Your Stock Portfolio
All portfolios should remain fully invested. If your risk tolerance, for example, says you should be 70% in stocks and 30% other, your 70% should be fully invested in the stock market. New money should be dollar cost averaged into the market over the next 6 to 12 months.
Bond Market Outlook
The Federal Reserve Open Market Committee held a two-day meeting in early May and voted to keep the federal funds rate unchanged at the range of 1.00% to 1.25%. Members also maintained the existing policy of reinvesting principal payments of agency and mortgage-backed securities and rolling over maturing U.S. Treasury holdings at auction. These actions preserve the Federal Reserve’s (the Fed) balance sheet at $4.5 trillion.
By continuing to hold $4.5 trillion in longer-term assets, the Fed is holding down longer-term interest rates. Now that short-term rates are rising, this is flattening the yield curve, meaning that yields on longer-maturity bonds are falling.
It is important to note that although the yield curve has flattened recently, it remains well in positive territory. The curve flattening is attributable to increases in the federal funds rate and diminishing prospects for fiscal stimulus this year.
There is broad support among Fed members to begin reducing the size of the Fed’s balance sheet this year. Although details on the mechanics are evolving, the Fed expects the approach to be gradual and predictable. The plan is to announce a set of gradually increasing caps or limits on the dollar amounts of Treasury and agency securities that would be allowed to run off each month. This means it will take several years for the balance sheet to return towards normal levels.
Please take note of the following:
The association of American Railroads reported total rail traffic was up 5.5% year over year for the week ending May 20th.
The American Trucking Association’s Truck Tonnage Index declined -2.5% in April. During the first four months of 2017, truck tonnage slipped -0.3% vs. 2016.
Port traffic in Los Angeles surged 8.9% to the best April in 110 years, setting a new volume record. On a rolling 12-month basis, inbound traffic is up 0.9% and outbound traffic was up 0.5%.
U.S. Treasury Secretary Mnuchin has asked Congress to raise the debt ceiling prior to Congress leaving on their August recess. The debt limit is currently at $19.85 trillion.
New Treasury issues are paying as follows:
2 Year 1.30%
5 Year 1.75%
10 Year 2.175%
30 Year 2.836%
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 1.72%
10 year 1.81%
30 year 1.95%
Current inflation remains well below the Fed’s target of 2%.
Certificates of Deposit
Here are some CD rates as paid by the following banks:
- 1 Year 1.45% with $5,000
- 2 Year 1.65% with $5,000
- 3 Year 1.92% with $5,000
- 4 Year 2.00% with $5,000
- 2 Year 1.70% with $10,000
- 5 Year 2.35% with $10,000
Recommended Action for Your Bond Portfolio
With interest rates currently on the very low side, bond prices are very high. If your bond portfolio occupies an excessive slice of your overall portfolio, perhaps this is a good time to take some bond money off the table. In general, where can you hold your bond market money?
1. When interest rates rise, existing bond prices will drop – this is mathematically guaranteed! You can lose money in the bond market. Therefore, wait for bond prices to drop as bond yields move up by putting some of your bond market money into a money market fund. You won’t make any money, but then again you won’t lose any either.
2. Put some of your bond market money in mutual funds that invest in real estate investment trusts and real estate companies.
3. Stay away from international bond funds as international bonds are paying a lower yield than U.S. bonds.
4. With the remainder, buy only short-term or intermediate term U.S. investment grade corporate bonds or several no-load, low-cost, highly diversified bond funds.
Need help with your portfolio?
Lorenz 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 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.