Stocks Enter A Trading Range – Equity Markets Update

Markets rebounded in April as fundamental factors drove prices higher. Among the factors influencing the markets were global expansion, positive domestic activity, increasing earnings, and capital spending increases.

Stocks traded sideways, with the S&P 500 temporarily trading below its 200-day moving average in early April and then bouncing back toward the middle of its recent trading range. This technical narrative is essentially positive, meaning that the market bounced from a low upward towards possible new highs.

Market watchers have termed the drop in equity prices in early February as a “shock drop”, resembling reactions driven by human behavioral activity. Since the initial down turn in February, there have been several intermediate-term downturns, alluding to fundamental weaknesses that have not materialized.

Correlations among various equity sectors has diminished as specific industries and companies are sought after rather than the broad indices. Analysts refer to this as a “stock picker’s market”.

Analysts raised their 2018 forecasts for revenue growth for S&P 500 companies to 7.2%, up from 5.4% in 2017. Financial and industrial stocks historically have seen earnings improvements during rising inflation and rising rate environments.          (Sources: S&P, Bloomberg, Reuters)

10 Year Treasury Bond Hits 3% – Fixed Income Overview

The 10-year Treasury bond yield reached 3%, a psychological level for the bond market. Breaching the 3% mark is expected to pose lending constraints for businesses and consumers as loan costs rise.

The drop in bond prices has placed bonds as a more attractive option for income seeking investors since bonds are favored during periods of market volatility due to traditionally experiencing less volatility than stocks.

Short-term rates and long-term rates are coming closer together, known as a flattening yield curve. Short-term rates are rising faster, which are highly influenced by the Federal Reserve’s rate increases. Long-term rates are established by the market as well as the expectation of economic growth and inflation. 

The issuance of corporate debt by companies is increasing before rising rates heighten the cost to borrow above current levels. A demand for fixed income globally continues to fuel the issuance of new bond issues as well. Consumers and homeowners with loans tied to rising short-term rates, such as the Libor and Fed Funds rates, are expected to feel the effects of rising rates the most.     (Sources: Bloomberg, U.S. Treasury, Federal Reserve)

Cash is king (again)…

Money-market funds, often used as a cash equivalent in some investors’ portfolios, fell out of favor after the 2008-09 financial crisis, with yields dropping to 0.1 percent in many cases. But the Federal Reserve’s interest-rate hikes, which began in December 2015, have changed the equation for the better.  The Crane 100 Money Fund Index, which measures the average yield of the 100 largest taxable funds, registered a yield of 1.55 percent as of April 30.

Prior to the financial crisis, in 2007, many money-market funds yielded 5 percent or more. But the crash of the banking industry led the Fed to push short-term interest rates to almost zero.  Now things are different. The Fed has raised rates six times over the last two-plus years, most recently in March, leaving the federal funds rate target at 1.5 to 1.75 percent. And Fed officials indicate another two to three rate increases are likely this year which would push money-market fund yields to 2 percent by the end of the year.

It is important to understand that even though money-market funds are historically safe and new regulations should make them even safer, there is still some risk; they don’t have iron-clad guarantees from FDIC insurance like savings accounts do.  During the financial crisis in 2008 some funds broke the buck—reduced its share price below $1—because of its exposure to Lehman Brothers debt securities.

The FDIC insurance may be protection well worth obtaining, even though it sometimes means giving up yield, there’s not much sacrifice in opting for an online savings account.  Since several bank deposits and saving accounts yield 1.75 percent or more, currently it is hard to make a case for money-market funds over FDIC-insured accounts.  (Source:  wealthmanagement.com)

Personal Savings Rate Indicates Consumer Sentiment – Consumer Behavior

Federal Reserve data show that the average consumer checking account balance, a measure of consumer personal savings, has increased in 23 of the past 30 quarters. Recent data from December 2017 through March 2018, illustrates an increase in the savings rate to 3.1% of disposable personal income as of March 2018. Economists view this increase as a possible pause in economic growth until consumers feel more confident about spending.

Historically, Americans tend to save more as economic times become more difficult, and tend to spend during prosperous periods. Past slow downs such as in the mid 1970s and the early 1980s saw an increase in the savings rate, a barometer of consumer sentiment. The expansion during the mid-to-late 1990s saw a gradual drop in savings, as consumers spent more confidently as their incomes rose.     (Sources: https://fred.stlouisfed.org/series/PSAVERT)