Courtesy of smokedsalmon / FreeDigitalPhotos.net

Courtesy of smokedsalmon / FreeDigitalPhotos.net

The Markets

There is no substitute for mental preparedness. Just ask any professional athlete or Navy SEAL. One essential aspect of mental preparation is situational awareness – being able to identify, process, and understand what is happening around you at any given time.

That’s been a challenge for bond investors this year. 2014’s Treasury market rally took economists (and everyone else) by surprise:

“Treasury yields lurched higher in May 2013, when the Fed first sketched out a timetable to wind down its bond-buying program, even though it didn’t actually begin the winding down until seven months later. Yields were expected to keep rising this year as that program ended and the Fed turned its attention to raising its short-term policy rate but, instead, yields have fallen as investors still seem enamored of bonds.”

A Bloomberg survey (August 8-13) found economists’ median forecast projected 10-year Treasury yields would be 2.7 percent by the end of September. The yield on 10-year U.S. Treasuries finished last week at 2.34 percent.

It’s likely bond market surprises may continue during the next few months. In fact, bond investors may want to mentally prepare themselves for a rough and bumpy ride. It’s likely analysts and investors will try to anticipate the Federal Reserve plans for increasing interest rates, and it’s not all that hard to imagine the type of volatility that could ensue. All you have to do is think back to the ups and downs that punctuated guesses about when the Fed might begin to end its bond-buying program.

Barron’s offered the opinion the first rate hike won’t happen until March of 2015, but that won’t stop anyone from speculating it could happen earlier. Conjecture, rumor, and supposition are likely to begin before the Federal Open Market Committee meeting on September 16, 2014.

No matter how markets twist during the next few months, investors should keep their wits about them. Being mentally prepared may help.


Data as of 8/29/14

1-Week

Y-T-D

1-Year

3-Year

5-Year

10-Year

Standard & Poor’s 500 (Domestic Stocks)

0.8%

8.4%

22.3%

18.3%

14.4%

6.2%

10-year Treasury Note (Yield Only)

2.3

NA

2.8

2.3

3.5

4.2

Gold (per ounce)

0.7

7.0

-8.7

-11.0

6.1

12.2

Bloomberg Commodity Index

0.9

0.7

-3.8

-7.8

0.1

-1.2

DJ Equity All REIT Total Return Index

0.4

20.1

23.2

15.3

18.7

9.2

S&P 500, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

*The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.  You cannot invest directly in this index.

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.

* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

 

Sources:

http://www.military.com/special-operations/seal-training-mental-preparation.html

http://www.bloomberg.com/news/2014-08-29/treasury-market-rally-is-stronger-than-every-economist-predicted.html

http://online.barrons.com/news/articles/SB50001424127887323949604580122353379425656?mod=BOL_hp_we_columns (or go to http://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/09-01-14_Barrons-Bondholders_Fasten_Your_Seat_Belts-Footnote_3.pdf)

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