Weekly Perspective on Markets (Published to Clients on 1/6/14)

Like a half-full bottle of champagne that was left uncorked overnight, stock markets were anything but effervescent during the first few days of 2014.

On Tuesday, December 31, the Standard & Poor’s 500 Index (S&P 500) bubbled upwards, finishing 2013 at an all-time high. On Wednesday, markets were closed as Americans celebrated the New Year. On Thursday, despite relatively positive economic news, the S&P 500 suffered its worst first-day-of-the-new-year performance since 2008. Is it a hangover? Is it lethargy? Are people still on holiday?

Some folks think a key issue is concern about the Fed’s changing monetary policy. MarketWatch suggested investors are wary about the timing of and reasoning behind the Federal Reserve’s decision to taper quantitative easing (QE) this month, as well as conflicting comments made by Fed officials. Last Friday, Philly Fed President Charles Plosser suggested the U.S. central bank may need to become aggressive about raising rates. His comments don’t square with those of outgoing Chairman Ben Bernanke who has said rates will remain near-zero for some time to come.

Plosser’s comments raise red flags because tapering QE is not the same as tightening monetary policy. Tapering is simply providing less economic stimulus. If the Fed raises rates, it will be tightening monetary policy. Generally, tighter monetary policy is used to constrict too-fast economic growth or curb rising inflation. Barron’s may have provided some insight into Plosser’s statement when it declared:

“…We also suspect U.S. and global economic growth will quicken more than most anticipate…Stronger economic growth combined with a further tightening in the resource markets (i.e., expect the unemployment rate to decline toward 6% by year-end and for the factory utilization rate to rise above 80% during the year) may lead to a modest rise in the U.S. inflation rate and produce the first “inflation scare/overheat/can the Fed exit fast enough” panic of the recovery.”

Hold onto your hats! The minutes of the Fed’s Open Market Committee meeting will be available this Wednesday and the way in which they’re interpreted could buffet markets.


Data as of 1/3/14

1-Week

Y-T-D

1-Year

3-Year

5-Year

10-Year

Standard & Poor’s 500 (Domestic Stocks)

-0.6%

-0.9%

25.5%

12.9%

14.6%

5.0%

10-year Treasury Note (Yield Only)

3.0

NA

1.9

3.3

2.5

4.4

Gold (per ounce)

1.7

2.8

-26.5

-3.4

7.7

11.4

DJ-UBS Commodity Index

-2.1

-0.7

-9.9

-8.4

0.7

-1.2

DJ Equity All REIT TR Index

0.3

0.7

1.9

9.2

18.2

8.7

Notes: 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.

 

* Quantitative easing is a government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market.  Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity.

* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.

* The Standard & Poor’s 500 (S&P 500) is an unmanaged index. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

* 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://online.barrons.com/article/SB50001424053111904742804579284810328140946.html?mod=BOL_article_full_popview#text.print (or go to http://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/01-06-14_Barrons-Splits_Dive-Cheap_Stocks_Thrive-Footnote_1.doc)

http://www.marketwatch.com/story/stock-market-to-find-out-if-the-fed-made-the-right-move-2014-01-05

http://www.investopedia.com/terms/t/tightmonetarypolicy.asp

http://online.barrons.com/article/SB50001424053111903675404579298633659690604.html?mod=googlenews_barrons#articleTabs_article%3D1 (or go to http://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/01-06-14_Barrons-How_to_Play_2014s_Surprise_Economy-Footnote_4.doc)

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