Actions Speak Louder Than Words

Weekly Market Commentary

July 1, 2013 

The Markets

Soothing words from Federal Reserve Bank officials helped settle investors’ fears last week, and U.S. stock markets moved higher. The Dow Jones Industrials Average was up 0.7 percent, the Standard & Poor’s 500 gained 0.9 percent, and the NASDAQ rose by 1.4 percent.

Markets were more stable during the week, and the CBOE Volatility Index (VIX), which gauges investors’ fear by measuring volatility expectations for the coming 30-day period, fell by 2 percent to finish the week just below 17.

Economic data was mixed. On the negative side, U.S. Gross Domestic Product (GDP) growth from January through March was revised downward from 2.4 percent to 1.8 percent annually. On the positive side, U.S. home prices gained more than 12 percent in April, which was the biggest year-to-year gain since 2006. Home sales for May also were strong, reaching a level last seen six years ago, according to the Denver Post.

Gold suffered another difficult week. Some believe the sell-off is the result of changing expectations as fear that quantitative easing might lead to hyperinflation, systemic collapse of the financial system, or devaluation of currency have begun to ease.

U.S. stock markets delivered positive performance for the quarter, as well. The Dow gained 2.3 percent, the S&P 500 was up 2.4 percent, and the NASDAQ rose by 4.2 percent. Year-to-date, the S&P 500 gained more than 12 percent during the first six months of 2013. That was its best first half of the year performance in more than a decade, according to Yahoo! Finance.

This week, some experts foresee the possibility that Fourth of July fireworks could be followed by a new round of market volatility as investors and analysts try to use the June employment report to predict the timing of monetary policy changes.

Data as of 6/28/13

1-Week

Y-T-D

1-Year

3-Year

5-Year

10-Year

Standard & Poor’s 500 (Domestic Stocks)

0.9%

12.6%

20.9%

14.3%

4.7%

5.1%

10-year Treasury Note (Yield Only)

2.5

N/A

1.6

3.0

4.0

3.5

Gold (per ounce)

-8.0

-30.0

-23.5

-1.9

5.1

13.2

DJ-UBS Commodity Index

-2.2

-10.5

-4.6

-0.3

-11.8

0.7

DJ Equity All REIT TR Index

4.0

5.6

12.7

16.3

7.6

11.0

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.

Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

They say actions speak louder than words, but that doesn’t appear to be the case when it comes to Federal Reserve monetary policy. For some time, the Fed has been communicating its intention to gradually cut back its bond purchasing program (a.k.a. quantitative easing) while keeping the target fed funds rate steady. The target fed funds rate is the interest rate at which banks borrow money from each other overnight. The Fed has not taken action yet, but its words have caused nominal bond yields to rise and inflation expectations to fall. Typically, these changes are associated with tightening monetary policy.

The Fed’s words also triggered significant market volatility. An article in The Economist suggested:

“Fed officials are doubtless annoyed by the market’s skittish reaction to the idea of tapering. In its view a more leisurely pace of buying does not amount to tightening. Fed economists reckon the size of the central bank’s balance-sheet is what matters most: so long as its asset pile is growing, policy is getting looser. By the Fed’s estimates, halving the monthly rate of asset purchases would be equivalent to trimming the federal-funds rate by five basis points per month instead of ten.”

The gap between the Fed’s perceptions and the markets’ response has been significant, and investors and analysts are scrambling to interpret the economic tea leaves. Researchers at Barclays Capital, whose work was cited in The Economist, have tried to determine how tapering may affect investment assets. Since stock markets in emerging countries and high-yield bond markets in the United States and Europe responded the most to the Fed’s quantitative easing program, experts anticipate these markets also may respond the most strongly when tapering begins.

Weekly Focus – Think About It

“Fear comes from uncertainty. When we are absolutely certain, whether of our worth or worthlessness, we are almost impervious to fear.

 —William Congreve, English playwright and poet

Best regards,

John Raudat

Canoga Wealth Management LLC

 

P.S.  Please feel free to forward this commentary to family, friends, or colleagues. If you would like us to add them to the list, please reply to this e-mail with their e-mail address and we will ask for their permission to be added.

 

Securities offered through LPL Financial, Member FINRA/SIPC.

 

 

* This newsletter was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the named broker/dealer.

                                     

* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

 

* 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.

 

* Past performance does not guarantee future results.

 

* You cannot invest directly in an index.

 

* Consult your financial professional before making any investment decision.

 

* To unsubscribe from the Weekly Market Commentary please reply to this e-mail with “Unsubscribe” in the subject line.

 

Sources:

http://www.reuters.com/article/2013/06/28/us-markets-stocks-idUSBRE95N0HT20130628

http://www.investopedia.com/terms/v/vix.asp

http://www.optionmonster.com/news/article.php?page=pmc/vix_below_17_as_stocks_extend_streak_83001.html

http://www.guardian.co.uk/business/2013/jun/26/commerce-department-economic-recovery-gdp

http://www.denverpost.com/business/ci_23539526/flurry-positive-u-s-economic-reports-reflects-feds#ixzz2XchpDWgI

http://finance.yahoo.com/blogs/the-exchange/gold-slide-isn-t-over-184734466.html

http://finance.yahoo.com/news/wall-street-week-ahead-fed-221408990.html

http://www.federalreserve.gov/mediacenter/files/FOMCpresconf20130619.pdf

http://www.investopedia.com/articles/stocks/09/how-interest-rates-affect-markets.asp

http://www.economist.com/blogs/freeexchange/2013/06/monetary-policy-2?zid=295&ah=0bca374e65f2354d553956ea65f756e0

http://www.investopedia.com/terms/m/monetarypolicy.asp

http://www.economist.com/news/finance-and-economics/21579833-federal-reserve-tries-clarify-its-goals-tinker-taper

http://www.economist.com/blogs/graphicdetail/2013/06/focus-4

http://www.brainyquote.com/quotes/quotes/w/williamcon393324.html

 

1-179811

 

 

John Raudat

Canoga Wealth Management LLC

 

9 North Main Street

P.O. Box 375

Chester, CT  06412

860-526-5000

 

John Raudat is a Registered Representative with, and securities offered through, LPL Financial. Member FINRA/SIPC.

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