Interest Rates, Treasuries and Inflation

The Weekly Update

Week of February 26, 2018
By Christopher T. Much, CFP®, AIF®

Last week, the Presidents’ Day holiday meant markets were only open for 4 trading days, and during that time, we received comparatively few economic reports. Nonetheless, major domestic indexes showed considerable volatility and posted losses for 3 straight days. By Friday, however, stocks rebounded and ended the week in positive territory. For the week, the S&P 500 gained 0.55%, the Dow added 0.36%, and the NASDAQ was up 1.35%. International stocks in the MSCI EAFE lost ground, dropping 0.50%.

What drove market performance last week?

Once again, inflation and interest rates were on many investors’ minds. In particular, multiple reports from the Federal Reserve contributed to performance.

On Wednesday, the Fed released minutes from its January meeting, which indicated that officials had concerns about inflation. The minutes revealed that between rising inflation and economic growth, the Fed sees justification for continued interest-rate increases. In reaction to the news, 10-year Treasury note yields hit their highest level in 4 years.

How do treasury yields and stock prices affect each other?

To say that the interaction between treasuries and stocks is complex would be an understatement. At its most basic, prices for stocks and bonds usually move in opposite directions. When stock prices go up, bond prices drop—and vice versa. For treasuries and other bonds, yields rise when their prices drop. As a result, when the stock market jumps, treasury yields often do, too.

Last Wednesday, however, rising yields may have contributed to a drop in the markets. Why?

Some investors become concerned when 10-year Treasury yields hit 3%, since that percentage level has aligned with bear markets for the past several decades. On Wednesday, the yields hit 2.94%—just a sliver away from that “warning” level. Please note that the rate-driven analysis triggering this concern is likely far too simple and may not accurately predict what’s ahead. With that said, the concern still could affect investor reactions.

What happened later in the week?

Friday, the Fed shared more information with a new report on its monetary policy. The details helped allay some investors’ fears of interest rates increasing too quickly. In reaction, yields on 10-year Treasury decreased to 2.87%—and the S&P 500 had its largest gain in weeks.

What’s on the horizon?

After receiving multiple perspectives from the Fed last week—but relatively few new data updates—we should gain significant economic insight this week. From a Gross Domestic Product reading to perspectives on manufacturing and consumer confidence, investors will have many fresh data points to analyze. We will monitor these updates closely and continue to help you stay informed about where the economy stands and what to expect in your financial life.

ECONOMIC CALENDAR:
Monday: New Home Sales
Tuesday: Durable Goods Orders, Consumer Confidence
Wednesday: GDP
Thursday: Motor Vehicle Sales, PMI Manufacturing Index, ISM Mfg Index
Friday: Consumer Sentiment

Past performance is no guarantee of future results. Data collected from Investors FastTrack software.
http://wsj-us.econoday.com/byweek.asp?day=20&month=2&year=2018&cust=wsj-us&lid=0
https://www.cnbc.com/2018/02/23/fed-sees-economy-past-full-employment-but-with-only-moderate-wage-gains.html
http://performance.morningstar.com/Performance/index-c/performance-return.action?t=SPX&region=usa&culture=en-US
http://performance.morningstar.com/Performance/index-c/performance-return.action?t=%21DJI&region=usa&culture=en-US
http://performance.morningstar.com/Performance/index-c/performance-return.action?t=@CCOhttps://www.msci.com/end-of-day-data-search
https://www.marketwatch.com/story/heres-why-stock-market-investors-need-to-keep-an-eye-on-the-yield-curve-2018-02-22
https://www.cnbc.com/2018/02/23/us-stock-futures-dow-data-earnings-and-politics-on-the-agenda.html
https://finance.zacks.com/correlation-treasuries-stocks-10871.html
https://www.marketwatch.com/story/heres-why-stock-market-investors-need-to-keep-an-eye-on-the-yield-curve-2018-02-22
https://www.cnbc.com/2018/02/23/us-stock-futures-dow-data-earnings-and-politics-on-the-agenda.html
https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield
https://www.marketwatch.com/story/heres-why-stock-market-investors-need-to-keep-an-eye-on-the-yield-curve-2018-02-22
https://www.cnbc.com/2018/02/23/us-stock-futures-dow-data-earnings-and-politics-on-the-agenda.html
https://www.bloomberg.com/news/articles/2018-02-22/asian-stocks-set-to-edge-higher-dollar-slides-markets-wrap
http://wsj-us.econoday.com/byweek.asp?day=26&month=2&year=2018&cust=wsj-us&lid=0
Interest Rates, Treasuries and Inflation2018-02-26T12:03:36-04:00

Chomping at the Bitcoin

Cryptomania blasts ahead

Not a day goes by – perhaps not even an hour – where the conversation does not turn to cryptocurrency. Bitcoin, Ethereum. Litecoin, Ripple, to mention a handful. As interest skyrockets in these potential investments, we thought it appropriate to take a step back and dig into cryptocurrencies a little further.

Grab a copy of our newest article here.

Chomping at the Bitcoin2018-02-22T14:55:11-04:00

Stocks Rebound

The Weekly Update

Week of February 20, 2018
By Christopher T. Much, CFP®, AIF®

Markets rebounded last week, posting sizable gains and moving back into positive territory for the year. All three domestic indexes experienced their largest weekly growth in years, despite losing some ground on Friday after news of additional indictments in the Russia investigation.

By markets’ close on February 16, the S&P 500 added 4.30%, the Dow was up 4.25%, and the NASDAQ increased 5.31%. International stocks in the MSCI EAFE also gained 4.18% for the week.

This performance, however, did not come from simple, straightforward increases. Instead, the volatility from recent weeks continued. In fact, the S&P 500 lost or gained at least 1% on 8 of the past 10 trading days. The index only experienced that movement level 8 times throughout 2017.

Key Economic Findings

We received a wealth of data last week, and the readings helped deepen our understanding of the economy. The reports showed some mixed results, but much of the information continues to indicate that the economy is on solid ground.

January Highlights

  • Housing starts jumped 9.7%, beating expectations and reaching the second fastest rate since the recession. Even with mortgage rates increasing and tax reform affecting some buyers’ mortgage interest deductions, the data shows positive news for future homebuilding as well.
  • Consumer price index increased 0.5%, rising 2.1% in the past year. This reading indicates that prices are continuing to rise faster than the Federal Reserve’s target rate.
  • Retail sales fell, dropping 0.3% in part due to slow motor vehicle sales. In addition, negative updates to December’s readings could affect fourth quarter Gross Domestic Product results.

February Highlights

  • Consumer sentiment beat expectations, coming in at 99.9 – its second highest reading in 14 years. The movement came as tax-cut optimism outweighed stock-market concerns.

The Takeaway

Many reports show that the economy is strong, so watching for inflation will remain important as the markets keep moving. The combination of growing inflation and a strong labor market means the Fed is still likely to hike rates 3 times this year, with a fourth increase very possible.

Looking ahead, volatility may continue, so keep this on your radar. Investors caught between conflicting concerns about missing the bull market and losing money may contribute to ongoing uncertainty. Remember, stock fluctuations are normal. We are here to help you understand what’s happening in the markets and how to position yourself for the financial life you desire.

ECONOMIC CALENDAR:
Monday: U.S. Markets Closed for Presidents’ Day
Wednesday: Existing Home Sales
Thursday: Jobless Claims

Past performance is no guarantee of future results. Data collected from Investors FastTrack software.
https://www.cnbc.com/2018/02/16/us-stocks-strong-week-volatility-rates.html
http://performance.morningstar.com/Performance/index-c/performance-return.action?t=SPX&region=usa&culture=en-US
http://performance.morningstar.com/Performance/index-c/performance-return.action?t=%21DJI&region=usa&culture=en-US
http://performance.morningstar.com/Performance/index-c/performance-return.action?t=@CCO
https://www.msci.com/end-of-day-data-search
https://www.cnbc.com/2018/02/16/us-stocks-strong-week-volatility-rates.html
https://www.ftportfolios.com/Commentary/EconomicResearch/2018/2/16/housing-starts-increased-9.7percent-in-january
https://www.marketwatch.com/story/cpi-surges-05-in-january-but-yearly-rate-of-inflation-unchanged-2018-02-14
http://wsj-us.econoday.com/byshoweventfull.asp?fid=485748&cust=wsj-us&year=2018&lid=0&prev=/byweek.asp#top
http://wsj-us.econoday.com/byshoweventfull.asp?fid=485844&cust=wsj-us&year=2018&lid=0&prev=/byweek.asp#top
https://www.ftportfolios.com/blogs/EconBlog/2018/2/14/the-consumer-price-index-rose-0.5percent-in-january
https://www.cnbc.com/2018/02/16/us-stocks-strong-week-volatility-rates.html
Stocks Rebound2018-02-20T14:30:09-04:00

Special Update: Understanding Volatility

The Weekly Update

Week of February 12, 2018
By Christopher T. Much, CFP®, AIF®

After months of relative calm, market fluctuations are causing many investors to wonder what is happening to the economy. Last week, the S&P 500 lost 5.16%, the Dow dropped 5.21%, and the NASDAQ declined 5.06%. The MSCI EAFE also gave back 6.19%. These losses pushed all four indexes into negative territory for the year. In addition, the weekly performance included significant volatility, as stocks had large fluctuations both within days and from one day to the next. The Dow, for example, lost over 1000 points twice during the week—and twice gained over 300 points.

During times like these, viewing events in their proper context is imperative. This week, we are going beyond our typical market update to provide you with clarity and perspective.

Our Analysis of the Recent Market Turbulence
The markets started 2018 with the wind in their sails, and investors watched as indexes continued their nearly straight-up trajectory from 2017. Then, after the S&P 500’s best January performance since 1997, stocks took a dive at the beginning of February. On Monday, February 5, the Dow and S&P 500 each lost more than 4%, and the NASDAQ’s drop was nearly as significant. The next day, all 3 indexes posted positive returns. The volatility continued throughout the week. On Friday, February 9, the indexes recovered some of their losses, but each still ended the week down more than 5%.

We understand how unnerving these fluctuations can feel—especially as headlines shout fear-inducing statistics. Our goal is to help you better understand where the markets stand today and how to apply this knowledge to your own financial life.

Putting Performance into Perspective
When markets post dramatic losses or whipsaw back and forth, many people wonder what causes the turbulence and may assume negative financial data is to blame. However, the recent selloff and volatility don’t have the culprits you might expect.

No negative economic update or geopolitical drama emerged to spur the selloff February 5–6. Instead, emotion-driven investing may have combined with computer-generated trading to fuel the decline. In particular, after the latest labor report showed wage growth picking up more than expected, some investors began to worry about increasing inflation. Higher wages can mean companies have to raise their prices to support their labor costs, a cycle that can cause inflation to grow.

While concerns about inflation and interest rates may be to blame for the market fluctuations, it may not be the only detail to focus on. Another key point is important to remember as an investor: Volatility is normal.

Volatility Facts

  • Average Intra-Year Declines: Since 1980, the S&P 500 has experienced an average correction each year of approximately 14%. But in 2017, the markets were unusually calm, fluctuating only 3%. Before this recent decline, the S&P had gone more than 400 days without losing over 5%—its longest span since the 1950s.

Takeaway: Markets fluctuate, and the recent lack of volatility is what’s truly unusual.

  • Percentages vs. Points: Many news articles mention that the Dow’s 1,175-point drop on February 6 was its highest decline in history. While this statement may be true, it leaves out a key detail: The higher an index goes, the smaller a percentage of its total that each point represents. In other words, 1,175 points doesn’t have the same impact at 25,000 that it does at 10,000.

Takeaway: Focus on percentages, not points, to gain a clearer view of market performance.

  • Recovery from Bad Days: The S&P 500 fell 4.1% on February 5, but within 1 day, the index regained 1.7%. Then, on February 8, the S&P 500 lost another 3.8% but gained back 1.49% the next day.This performance surpasses historical data. If you analyze the S&P 500’s 15 worst days—where the index lost an average of 8.16%—stocks were still in negative territory 1 day later. However, in 13 instances, stocks were back up within a year by about 21%; they remained in positive territory 5 years later.

Takeaway: Even when stocks lose more ground than they just did, they tend to recover and positive performance usually returns.

Remembering the Last Market Correction
In August 2011, the S&P 500 lost 6.66% in one day. At that time, the European debt crisis was in full swing, the U.S. had lost its AAA credit rating, and the financial sector was reeling. Volatility measures indicated that many investors were becoming worried. Facing that situation, impulses to leave the market and avoid further losses could have arisen. As is so often the case, however, staying invested paid off.

Only a year later, the S&P 500 had gained over 25%.

Knowing Where to Go from Here
Over short periods of time, the market trades on fear, anxiety, greed, and emotion. Over the long term, however, economic fundamentals drive the markets.

Thankfully, a variety of data indicate that the economy continues to grow:

  • Labor Market: The economy added 200,000 new jobs in January and beat expectations. Average hourly wages also increased, bringing 2.9% growth in the past 12 months—the largest rise since 2008–2009.
  • Corporate Earnings: The majority of S&P 500 companies who have reported their 4th quarter results have beaten their earnings estimates.
  • Service Sector: The latest reading of the ISM Non-Manufacturing Index (which tracks performance and expectations for service-sector businesses) hit its best level since 2005.
  • Consumers: The most recent data indicates that personal income and spending are on the rise.

As investors try to determine whether inflation is on the rise and higher interest rates are imminent, volatility could continue. After last year’s smooth sailing in the markets, these fluctuations may feel harder to withstand. The reality is that equities don’t move in a straight line.

Even if volatility is here to stay, we know that price changes can provide new market opportunities. We agree with the economists at First Trust who assert that, “More economic growth will ultimately be a tailwind for equities, not a headwind.”

We encourage you to focus on your long-term goals, rather than short-term fluctuations. As you do, avoid allowing emotions to derail your plans. We also want you to feel comfortable in your financial journey. If your thoughts on risk have changed, call us so we can help you find the best path forward.

As always, we are here to provide you with clarity, perspective, and support during every market environment. Thank you for the confidence you place in our abilities. We consider it a privilege to be good stewards of the assets you entrust to our care.

ECONOMIC CALENDAR:
Monday: Treasury Budget
Wednesday: Consumer Price Index, Retail Sales
Thursday: Jobless Claims, Industrial Production, Housing Market Index
Friday: Housing Starts, Import and Export Prices, Consumer Sentiment

Past performance is no guarantee of future results. Data collected from Investors FastTrack software.
http://performance.morningstar.com/Performance/index-c/performance-return.action?t=SPX&region=usa&culture=en-US
http://performance.morningstar.com/Performance/index-c/performance-return.action?t=%21DJI&region=usa&culture=en-US
http://performance.morningstar.com/Performance/index-c/performance-return.action?t=@CCO
https://www.msci.com/end-of-day-data-search
https://www.cnbc.com/2018/02/09/us-stock-futures-dow-data-earnings-market-sell-off-and-politics.html
https://www.bloomberg.com/news/articles/2018-02-02/stocks-in-rate-wringer-with-rout-raising-existential-questions
http://money.cnn.com/2018/02/05/investing/stock-market-today-dow-jones/index.html
https://www.cnbc.com/2018/02/06/us-stock-futures-dow-data-earnings-market-sell-off-and-politics-on-the-agenda.html
https://www.cnbc.com/2018/02/09/us-stock-futures-dow-data-earnings-market-sell-off-and-politics.html
https://www.cnbc.com/2018/02/05/why-the-stock-market-plunged-today.html?recirc=taboolainternal
https://www.theguardian.com/business/2018/feb/02/us-bond-market-rout-fears-trigger-wall-street-sell-off
First Trust, Staying the Course, 12/31/17
https://www.reuters.com/article/us-global-markets-volatility/explainer-investors-burned-as-bets-on-low-market-volatility-implode-idUSKBN1FQ2GL
http://www.cnn.com/2018/02/06/us/five-things-february-6-trnd/index.html
https://www.cnbc.com/2018/02/05/fidelity-says-it-saw-no-panic-among-its-customers-and-more-buying-than-selling-during-the-plunge.html
https://www.cnbc.com/2018/02/06/us-stock-futures-dow-data-earnings-market-sell-off-and-politics-on-the-agenda.html
https://www.reuters.com/article/us-usa-stocks/wall-street-plummets-sp-dow-confirm-correction-idUSKBN1FS1UG
https://www.cnbc.com/2018/02/09/us-stock-futures-dow-data-earnings-market-sell-off-and-politics.html
First Trust, S&P 500 Performance After Its Worst Days, 6/17
First Trust, S&P 500 Performance After Its Worst Days, 6/17
http://money.cnn.com/2011/08/10/markets/markets_newyork/index.htm?iid=EL
First Trust, S&P 500 Performance After Its Worst Days, 6/17
https://www.ftportfolios.com/Commentary/EconomicResearch/2018/2/2/nonfarm-payrolls-rose-200,000-in-january
https://insight.factset.com/sp-500-earnings-season-update-february-2
https://www.ftportfolios.com/Commentary/EconomicResearch/2018/2/5/the-ism-non-manufacturing-index-rose-to-59.9-in-january
https://www.ftportfolios.com/Commentary/EconomicResearch/2018/1/29/personal-income-rose-0.4percent-in-december
https://www.ftportfolios.com/Commentary/EconomicResearch/2018/2/5/new-policies,-new-path
Special Update: Understanding Volatility2018-02-12T14:49:13-04:00

Markets Slide as Bond Yields Rise

The Weekly Update

Week of February 5, 2018
By Christopher T. Much, CFP®, AIF®

After 4 straight weeks of gains, the markets have slipped. As of Friday, the S&P 500 lost 3.85%, the Dow dropped 4.12%, and the NASDAQ decreased by 3.53%. International stocks in the MSCI EAFE also took a 2.78% hit. Domestically, the losses spanned sectors and asset classes. For the S&P 500, all 11 of the index’s industries lost ground last week. This decline came after the S&P 500 had its best January performance in over 20 years.

So, what happened?

Looking at the markets’ sizable losses, you might expect that discouraging economic data came out last week—or some geopolitical drama spooked investors. On the contrary, the drops came in response to news that seems positive on the surface: Job and wage growth are picking up.

Reviewing the Jobs Report
On Friday, the Bureau of Labor Statistics reported that we added 200,000 new jobs in January and beat expectations. Average hourly wages also increased, bringing 2.9% growth in the past 12 months—the largest rise since 2008–2009.

Analyzing the Reaction
When labor data came out, bond yields jumped and 10-year Treasury yields hit their highest level in 4 years. Stocks sank in reaction to these interest rate gains.

Concerns about inflation are fueling this reaction. As wages grow, companies may increase their prices to support their rising labor costs—contributing to an inflationary cycle. With inflation can come rising interest rates.

Because of this news, some investors became concerned that the Federal Reserve may increase interest rates this year more than initially expected.

Putting the Performance in Perspective
After the unusually calm market environment we experienced in 2017, last week’s declines may feel unsettling. However, price fluctuations are normal, and the economy continues to be strong.

In addition, as domestic indexes reach high levels, viewing their declines in terms of points, rather than percentages, can cause unnecessary concern. You may have read reports that the Dow dropped 665.75 points on Friday, contributing to its 6th biggest points decline in history. But even after losing nearly 1100 points in 5 days, the Dow was only down 4.12% for the week and remained up 3.24% for the year. Of course, every economic environment has risks, and no market can go up forever. We are aware of the risks that increasing inflation and interest rates may bring, and we are here to help you navigate what the future holds.

ECONOMIC CALENDAR:
Monday: ISM Non-Mfg Index
Tuesday: International Trade
Wednesday: EIA Petroleum Status Report
Thursday: Jobless Claims

Past performance is no guarantee of future results. Data collected from Investors FastTrack software.
http://performance.morningstar.com/Performance/index-c/performance-return.action?t=SPX&region=usa&culture=en-US
http://performance.morningstar.com/Performance/index-c/performance-return.action?t=%21DJI&region=usa&culture=en-US
http://performance.morningstar.com/Performance/index-c/performance-return.action?t=@CCO
https://www.msci.com/end-of-day-data-search
https://www.bloomberg.com/news/articles/2018-02-02/stocks-in-rate-wringer-with-rout-raising-existential-questions
https://www.theguardian.com/business/2018/feb/02/us-bond-market-rout-fears-trigger-wall-street-sell-off
https://www.ftportfolios.com/Commentary/EconomicResearch/2018/2/2/nonfarm-payrolls-rose-200,000-in-january
https://www.bloomberg.com/news/articles/2018-02-01/asia-stocks-to-slide-as-tech-stumbles-bonds-drop-markets-wrap
https://www.cnbc.com/2018/02/02/us-futures-move-lower-as-investors-worry-about-rising-yields.html
https://www.theguardian.com/business/2018/feb/02/us-bond-market-rout-fears-trigger-wall-street-sell-off
https://www.cnbc.com/2018/02/02/us-futures-move-lower-as-investors-worry-about-rising-yields.html
https://www.theguardian.com/business/2018/feb/02/us-bond-market-rout-fears-trigger-wall-street-sell-off
https://www.cnbc.com/2018/02/02/us-futures-move-lower-as-investors-worry-about-rising-yields.html
http://performance.morningstar.com/Performance/index-c/performance-return.action?t=%21DJI&region=usa&culture=en-US
Markets Slide as Bond Yields Rise2018-02-05T13:25:53-04:00