David S. McKechnie, CLU® Beauport Financial Services, LLC. 3 Heritage Way, Suite 2 Gloucester, MA 01930 (888) 283-0748 www.beauportfinancial.com Financial Market Update —January 31, 2015 A Slow Start for Stocks, Treasuries Shine The start to the New Year hasn’t been very generous to shareholders. While the Dow Jones Industrials and the S&P 500 Index remain near record highs, the bulls ran into a number of hurdles. But the uncertainty that stymied stocks was a boon to bonds. Index DJIA1 NASDAQ Composite2 S&P 500 Index3 Bond Yields 3-month T-bill 2-year Treasury 10-year Treasury 30-year Treasury Commodities Oil per barrel4 Gold per ounce5 January Return % -3.69 -2.13 -3.10 Yield* - % a/o Jan 30, 2015 0.02 -0.02 0.47 -0.20 1.68 -0.39 2.25 -0.50 Jan 30 Price, Monthly Change $47.85 -5.42 $1,260.25 -54.25 2015 YTD Return % -3.69 -2.13 -3.10 Yield - % a/o Dec 31, 2014 0.04 0.67 2.17 2.75 Year end 2014 $53.27 $1,206.00 Sources: U.S. Treasury, MarketWatch, St. Louis Federal Reserve, CNBC *includes monthly change The themes that dominated the headlines included the surging dollar, worries about the slow growth outside the U.S., global central banks that are implementing more aggressive monetary policies, and of course, the fall in oil prices. Those themes created turbulence during the month, with the Dow Jones Industrials rising or falling by more than 100 points in 14 of the 19 sessions (St. Louis Federal Reserve). Nine of the 14 days saw losses, while the remaining five were positive. Despite the volatility in stocks, the outlook for the U.S. economy has been brighter than what we’re seeing in Europe and Japan. China is growing faster than the U.S., at least according the official data, but its growth rate continues to moderate. Notably, the International Monetary Fund recently upgraded its forecast for U.S. economic growth by 0.5 percentage points to 3.5%. But elsewhere, it was a sea of red – see Table 1. International Monetary Fund Growth Projections 2015 GDP forecast Change from Oct 2014 3.5% +0.5 percentage points U.S. 1.2 -0.2 Euro area 0.6 -0.2 Japan 4.3 -0.6 Emerging markets 6.8 -0.3 China -3.0 -3.5 Russia 1.3 -0.9 Latin America Source: International Monetary Fund The world’s major central banks have responded to slow growth, and in some cases deflationary fears, in an increasingly aggressive fashion. The European Central Bank (ECB) announced it will begin buying 60 billion euros (about $68 billion) in bonds each month for the next 18 months (ECB press release), which is similar to the bond-buying program that ended last year in the U.S. The Bank of Japan is showing no signs of tapping on the brakes with its hyper-aggressive monetary policy. Meanwhile, central banks in Canada, India, Switzerland, and Denmark surprised investors by cutting key rates last month (Wall Street Journal, various sources). Slow global growth and easier monetary policies by central banks have been a big factor in driving bond yields to record lows in several European nations. For example, as the month came to a close, the German 10-year government bond sported a yield of just 0.30%, France stood at 0.54%, while Spain can borrow for 10 years at just 1.42% (Bloomberg). That compares with 1.68% for the U.S. 10-year Treasury. 30-year Treasury Yield Percent 10.0 Fig. 1 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 12/29/1989 12/29/1994 12/29/1999 12/29/2004 Data Source: St. Louis Federal Reserve Last date: Jan 30, 2015 2.25% 12/29/2009 12/29/2014 Falling yields around the world are influencing what’s happening in the U.S. bond market. Note in Figure 1 that the yield on the 30-year Treasury bond finished the month at a record low. In today’s world of global finance, capital knows no borders, and falling yields in Europe highlight the attractiveness of U.S. returns to global investors. Furthermore, the stronger U.S. economy, its relative economic stability, and the rising dollar add to the luster of U.S. investments, including government bonds. It’s icing on the cake. The ramifications of the surging dollar The stronger dollar will help keep a lid on import inflation, a plus for U.S. consumers. As the year came to a close, the Import Price Index released by the Bureau of Labor Statistics (BLS) fell 2.5% versus the same period a year ago. Yes, falling oil prices helped, but minus out fuels, import prices were unchanged. On the flip side, exports become less competitive. Traded Weighted Dollar Index: Major Currencies Fig. 2 115 110 105 100 95 90 85 80 75 70 65 1/1/1990 1/1/1995 1/1/2000 1/1/2005 1/1/2010 1/1/2015 Data Source: St. Louis Federal Reserve Last date: Jan 23, 2015 Note: the Trade-Weighted Dollar Index measures the dollar against major foreign currencies. It cannot be purchased directly. The rate can and does vary; past performance does not guarantee future results. As Q4 earnings season unfolds, most U.S. companies are topping analysts’ forecasts for profits (Thomson Reuters), but we’ve witnessed several high-profile misses thanks to the surging dollar (FactSet Research, Investor Relations respective firms). Simply put, a firm’s overseas sales may be growing in the local currency, but they are smaller when converted back into stronger dollars. On a lighter note, if you are thinking about a trip overseas, the dollar is an added incentive to travel. Unraveling a riddle at the Fed What the Federal Reserve does with monetary policy is very important because it affects the economy, stocks, interest rates, and bonds. The Fed hasn’t raised the target on the fed funds rate – the key short-term lending rate that banks use to lend overnight cash to each other – in almost 10 years (see Figure 3). Fed funds rate Fig. 3 Percent 7.0 0.14 Jobless rate: 5.6% Inflation rate: 2.8% 6.0 0.12 5.0 0.1 4.0 0.08 3.0 2.0 1.0 Jobless rate: 5.6% Inflation rate: 1.2% 0.04 Jobless rate: 6.6% Inflation rate: 2.1% 0.0 1/3/1992 0.06 0.02 0 1/3/1996 1/3/2000 1/3/2004 1/3/2008 1/3/2012 Data Source: St. Louis Federal Reserve, NBER, Wall Street Journal Last date: Jan 30, 2015; inflation based on the broad-based PCE Price Index; Current fed funds target: 0-0.25% According to the CNBC January Fed survey, Wall Street firms now see the first rate hike occurring in September, versus July in the prior survey. Yet, the Fed did not take a June rate hike off the table, according to the press release from its January meeting. The rate-setting committee upgraded its assessment of economic growth and the labor market, which are two key variables in the rate-hike equation. But inflation is also a factor, and it has continued to slow. Thanks in large part to falling energy prices, the Consumer Price Index has slowed from its 2014 peak of 2.1% to just 0.8% in December (BLS). The disinflationary trend in core inflation, which minuses out food and energy, has been more modest, slipping from 2.0% in May to 1.6% in December. Oil prices won’t fall forever, but the Fed conceded in January that it might take inflation a bit longer to get back to its 2% target. For the first time, the Fed acknowledged that “international developments” are part of its calculus. Many other global central banks are easing monetary conditions to combat their own problems with low inflation and slow growth. The divergence between what the Fed would like to do – start slowly raising interest rates – and what other central banks are doing has the potential to further unsettle markets if the Fed decides to swim against the current. In short, it is gradually opening what might be called a “backdoor,” allowing for a possible delay in what had been an expected mid-year rate increase just a short time ago. Stay tuned. Warmest Regards, Advisors Name/Signature Share! It’s OK with us if you would like to share the Market Update with your friends, family and neighbors. We love meeting new folks! It is important that you do not use this e-mail to request or authorize the purchase or sale of any security or commodity, or to request any other transactions. Any such request, orders or instructions will not be accepted and will not be processed. All items discussed in this report are for informational purposes only, are not advice of any kind, and are not intended as a solicitation to buy, hold, or sell any securities. Nothing contained herein constitutes tax, legal, insurance, or investment advice. 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Past performance does not guarantee future results. 2 The NASDAQ Composite is an unmanaged index of companies which cannot be invested into directly. Past performance does not guarantee future results. 3 The S&P 500 Index is an unmanaged index of 500 larger companies which cannot be invested into directly. Past performance does not guarantee future results. 4 New York Mercantile Exchange front-month contract; Prices can and do vary; past performance does not guarantee future results. 5 London Bullion Market Association; gold fixing pricing at 3 p.m. London time; Prices can and do vary; past performance does not guarantee future results. Copyright © 2015 Financial Jumble, LLC All rights reserved.