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August 2016

Meidell: U.K. stimulus news stimulates world markets

By Published Articles

By the time the U.S. markets opened Tuesday morning, stocks had rallied in Europe in overnight trading after Ian McCafferty, a member of the Monetary Policy Committee from the Bank of England, provided assurance that the U.K. stimulus package could be expanded if necessary. U.K. bond prices rose, and interest rates fell, on the suggestion that potential stimulus measures would continue to hold interest rates lower for an extended period; bonds rallied around the globe on the news.

Stock prices continue to grind higher, though many have expected the stock market to drift sideways during the month of August, as earnings season winds down and investors take their last vacations for the summer. The technology, financial and consumer staples sectors helped the major market averages finish in positive territory on Tuesday, with the Standard & Poor’s 500 eking out 0.04 percent gain and the Nasdaq Composite higher by 0.24 percent.

On Tuesday, the Department of Labor released the Productivity and Costs report for the second quarter, which showed that productivity fell by 0.5 percent — the consensus was for an increase of 0.5 percent. Though this is typically not a market-moving report, it was the third declining quarter in a row, which is the longest negative streak in the history of this report, going back to just after WWII. Though Americans worked more hours, productivity was not affected. Specifically, the report showed that although unit labor costs rose 2.0 percent, the lack of business investment played the largest role in falling productivity for the nation.

As the major market averages are breaking out to new highs, some investors are calling for the end of the bull market. However, what some may be missing is that a rotation among sectors can refresh and renew an advance that may appear to be getting tired. This week, energy stocks are getting some relief after a four-day rebound in crude oil prices, but the more important sectors to watch are financial and technology. The financial sector seems to be strengthening as the probability of the Fed raising interest rates later this year has gone up, while the technology sector appears to be anticipating a surge in the economy.

For the week, the top-performing sectors were led by the Dow Jones U.S. Energy index, up 3.58 percent over the past five trading days, followed by the Dow Jones U.S. Financial index, higher by 2.66 percent, and the Dow Jones U.S. Technology index rising by 2.47 percent over the same period.

Meidell: Buying bonds not always the safe bet

By Published Articles

Investors were unwilling to make any big changes to their portfolios on Thursday, opting instead to sit on their hands awaiting Friday morning’s release of the July employment report.

U.S. oil prices got a boost for a second day, rising 2.69 percent, after the Energy Information Association reported on Wednesday that weekly gasoline inventories fell by 3.3 million barrels, lowering concern over the oil supply glut. Though rebounding oil prices set a positive tone for the stock market, the major market averages finished the day little changed with the Standard and Poor’s 500 up a mere 0.02 percent and the Nasdaq Composite was higher by 0.13 percent on the day.

The big story on Thursday was the Bank of England’s announcement that it would buy as much as £10 billion ($13.33 billion) of U.K. corporate bonds starting in September, as well as £60 billion in government bonds. By purchasing corporate bonds, the Bank of England is taking a page from the European Central Bank’s play book, which started buying corporate debt two months ago as part of its stimulus efforts within the European Union. In response to the BOE’s announcement, the British Pound fell over 1.6 percent to nearly its post-Brexit lows, and interest rates fell around the globe.

Though buying bonds is just one move by central banks to hold interest rates low for extended periods, it is essentially a two-edge sword. Although it benefits corporations around the globe by providing them ultra-low interest rates, and therefore borrowing costs, it creates an environment where investors can be lured into taking excessive risk in search of yield.

After the stock market selloff in January, I was asked to take a look at an investor’s portfolio who thought they were adequately diversified between stocks and bonds. To my surprise, and theirs, nearly 40 percent of the portfolio was invested in low quality (junk) bonds, while the remainder was in stocks.  Understandably, the investor was attempting to increase the portfolio’s interest payments, but didn’t realize the additional risks.

This week the top performing areas of the bond market have gotten a bounce from both the recent weakness in the U.S. dollar and the BOE’s announcement of a new bond buying program. In the No. 1 spot this week is the Citi International Inflation Linked Securities index up 1.56 percent over the past five trading days, followed by the S&P International Corporate Bond index higher by 1.32 percent.

Meidell: World decline mitigates U.S. losses

By Published Articles

U.S. investors awoke on Tuesday to news that Japan’s Prime Minister Shinzo Abe’s cabinet had approved a stimulus package of ¥28 trillion ($274 billion) that disappointed some traders, while lifting the Japanese yen. Some European banks fell in overnight trading after warning of the impact that negative yields were having on their profits. After U.S stocks traded lower for the first four hours of the day, some investors saw the decline as a buying opportunity, pushing prices higher into the close, and recovering a portion of the day’s losses.

The Dow Jones Industrial Average closed lower for the seventh day in a row on Tuesday; this was the first time since August 2015 that the index has experienced seven consecutive losses. But don’t get too worried; over those seven days, the Dow has slipped a mere 1.30 percent, which isn’t much, really. On the other hand, for stocks indexes such as the Russell 2000 small-cap index, it was the second down day in a row, with the index lower by 1.38 percent on the day.

It was another difficult day for U.S. oil prices as crude oil closed below $40 per barrel for the first time since April. Though the Standard & Poor’s 500 declined 0.64 percent and the Nasdaq Composite fell 0.90 percent, bonds also had a tough day with the Barclay’s U.S. 20+ Year Treasury Bond index down 1.03 percent on Tuesday.

Even with the decline in stocks on Monday and Tuesday, some sectors were still in the positive for the past week, and like a compass points to where investors see the greatest opportunity for growth in the stock market in the months ahead. The top-performing sectors for the week were the Dow Jones U.S. Technology index, up 1.05 over the past five trading days, followed by the Dow Jones U.S. Healthcare index, higher by 1.00 percent.