Records Are Made To Be Broken

The S&P 500 established new record highs again this month, closing over the 1,900 level on multiple occasions. It’s hard to believe this same index was below 700 in March of 2009. By any definition this has been an impressive bull market, yet as Rodney Dangerfield would say, “this market gets no respect”.

The non-believers have their reasons: the Federal Reserve engineered this rally, the next 2008 is just around the corner, economic growth is too slow, unemployment is too high; politicians are leading us down a path of fiscal destruction, the market is rigged, slower growth in China, or political uncertainties around the globe to name a few. While some of these concerns are valid, the fact is record corporate profits are driving stock prices to record levels. The key question is; can the positive price momentum continue? Stocks are not cheap at today’s valuation and corporate profits slowed in the first quarter as weather impacted the bottom line. If May’s records are to be broken later this year the economy and corporate profits need to regain their momentum.

May stock returns were positive across the board keeping us in line for high single digit returns for the year. The S&P gained 2.35 percent for the month and closed at a new all-time high, 1,923.57. On the strength of Apple the NASDAQ appreciated by 3.30 percent. Even the beleaguered MSCI Emerging Market Index added 3.49 percent in May.

One of the biggest market surprises this year has been the strength and performance of the U.S. bond market. When the year began everyone was calling for higher interest rates and negative returns for U.S. fixed income. In predictable fashion, the opposite has occurred. Interest rates are lower, credit spreads are tighter and returns are exceeding expectations.
Interest rates directly affect bond prices as interest rates move lower, bond prices move higher. The opposite is also true. Beyond the short end of the yield curve, rates have moved lower this year causing bond prices to rise.

Bonds had a solid month as the yield on the 10-year U.S. Treasury dipped below 2.50%. The Barclays U.S. Aggregate Bond Index returned 1.14 percent in May with long-term US Treasuries once again providing the best monthly fixed income return at 2.88 percent. Intermediate Treasuries gained 0.69 percent while corporate bonds and mortgage-backed securities returned 1.37 and 1.20 percent respectively. The fully priced high yield sector added 0.92 percent in May.

Bond return expectations should match the reality of today’s fixed income market. Interest rates are near all-time lows; credit spreads are approaching historic tights, and the Fed is beginning the fifth inning of a nine inning Taper program. With yield’s low, expect low single digit returns from your bond portfolio. Your bond portfolio may experience modest price fluctuations in the months ahead, but the main return driver will be the income earned. Unfortunately, that income amount low due to tight credit spreads and low interest rates. Stay the course in bonds, but adopt realistic return expectations.

Commodities were the only major asset class losing value in May. Gold lost -0.15 percent of its value during the month and it is down -12.27 percent over the past year. The broader based Dow Jones UBS Commodity Index was down -2.87 percent for the month, but still up 2.50 percent for the trailing twelve months. Low inflation does not help commodity prices.

Amid all the daily noise from this past month from the hype of new records to the scare of the next correction; our best financial advice is to develop a thoughtful financial plan tailored to your situation and stay your course. Time will bring to your financial destination.

Posted on June 2, 2014
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