Interest Rates Gone Global

An article about U.S. Treasury bonds in today’s Wall Street Journal made it very clear that interest rates have gone global, especially for high quality bonds. The article pointed out that at the close of business this past Friday, the 10-year Treasury bond carried an interest rate of 2.597%. Given the growth prospects of the U.S. and political stability, the U.S. Treasury bond is of very high quality.

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Lost Momentum

The U.S. Government recently released results of economic growth for the first quarter. The report indicated that the economy shrank by 1%. While the expectation had been for slow growth, this significant negative reversal signaled a loss of momentum from the fourth quarter of 2013. The impact is visible in the housing industry, where both existing home and new home sales slowed. One would think that this information would result in a negative stock market reaction, but the S&P 500 soared to a new high.

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Demographics

The current economic picture is one of slow growth. The economy is moving in fits and starts but lacks momentum. The S&P 500 closed yesterday at 1885. At the end of 2013, the S&P 500 closed at 1848, meaning it has risen about 2% for the year to date. This certainly is not the robust market of 2013. Many reasons might account for slowing the growth in stocks, but overall, I’d say the stock market got ahead of itself.

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Fear of No Growth

Since the beginning of this year the stock and bond markets have been rather subdued. In 2013 the general outlook was that the economy was picking up momentum. The increase in business activity, business profits and a shrinking of government spending was seen leading the economy back to “normal.”  The results for the year were in many ways more robust than what had been expected.
 
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Cheap Natural Gas

Today, in the second section, page 2, of the Wall Street Journal (WSJ) an article appeared about what cheap natural gas means to the U.S. economy. For some time I’ve thought that the abundant gas in the United States would result in greater manufacturing coming here. I had not considered the impact of construction from this change. The WSJ reported that the chemical industry alone is accounting for more than $100 billion of new construction in the gulf coast states, with another $125 billion anticipated. This business investment is by the U.S., Germany, Canada, and other countries.

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Rhythm is Broken

Sometimes the stock market achieves a nice rhythm. We have recently seen such a period. After a poor start to the year, good economic news prevailed and the markets increased. Today in Reuters News Service, I noted a number of very good traits that should continue the momentum of growth in the economy. Factory orders rebounded from an eight-month low. Automobile sales increased. A gain in construction spending was reported, despite unseasonably cold weather! Consumer spending increased, with spending on services up 0.9%, the biggest gain since October 2001.

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A Correction?

As I have reported recently, it is not unusual for the stock market to have a correction after a lengthy time on the rise. Yesterday we saw that a correction can still be painful. The stock market dropped a little over 2% yesterday, meaning that anyone in the market at that time lost money. Although you are a long-term investor, that is your money. A correction is usually about a 10% drop in the value of stocks. This usually sets the stage for another increase in value.

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Doing its own Thing

Last year, equities were up significantly. Some wondered what would happen this year. As I am writing this, the S&P 500 was back to the December 19th level of 1805. On January 15, 2014, the S&P hit a record high of 1848. Interestingly, this record high for 2014 is the same as the closing point of the S&P at the end of the last year, meaning that the S&P is down about 2.5% since the end of 2013. Given that the stock market was up 28% last year, this change is barely a blip on the radar screen. So where is the money that is leaving the stock market going?

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Non-correlation

Non-correlation of investment assets may seem to be complicated, but it is very important to the long-term success of an investment portfolio. To understand non-correlation, we must first understand what we mean when assets are correlated. Investment assets are referred to as being highly correlated when they show a tendency to vary together. For example, U.S. stock classes--large, medium and small-- tend to increase and decrease in value together. For many years, large international stocks were not considered to be correlated to U.S. stocks, but they are now 92% correlated.

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