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, Reuter

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

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

What Could Cost More In Retirement – Retirement Planning

As retirement nears for millions of aging baby boomers, the realization of how to pay for retirement becomes a challenge for many.

Expenses that one was accustomed to while still working and raising a family changes dramatically once retirement arrives. The biggest challenge for many is how to maintain the same lifestyle in retirement as during working years. 

Unfortunately, many have realized that Social Security and menial retirement savings just aren’t enough to make up for lost wages. This either forces many retirees to seek part-time employment or merely live a less desirable lifestyle in order to minimize expenses.

Unforeseen expenses such as an illness not covered by Medicare or health insurance, home repairs, and emergency cash outlays may deplete valuable cash savings and derail what was thought to be a well executed financial plan. Retirees have found that liquidity during retirement is critical, thus avoiding the necessity to sell investments at gains or losses and even reducing income derived from them.

The biggest surprise that retirees are having is the increasing costs of drugs and healthcare. The Employment Benefit Research Institute has identified a number of expenses not necessarily planned for that are common among retirees: Special diets with foods and ingredients that may be more expensive than average, medical & toiletry items such as supplements and diapers, special transportation, medicare part A & B items not covered.

Sources: Employment Benefit Research, Social Security Adm., Medicare.gov