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May saw all the major stock indexes both
here and abroad post positive gains.Interest rates continued their steady decline, and many commodity prices
fell as well.
For the month of May the Dow Jones
Industrial Average (DJIA) gained 0.8%, the S&P 500 grew by 2.1%, the
Russell 2000 added 0.7% (first monthly gain since February), and the NASDAQ
rose 3.1%.Year-to-date the major
indexes look like this:DJIA +0.8%,
S&P 500 +4.1%, Russell 2000 -2.5%, and the NASDAQ +1.6%.
As I noted in my previous Update, the
second revision of the 1st Quarter 2014 Gross Domestic Product (GDP)
was expected to slip into negative territory and it did falling to -1.0%.This is the first negative quarterly GDP
number since the first quarter of 2011.Markets, as expected, shrugged off this bad news and posted gains for
the day.While a contraction in the
economy is obviously not good, remember that this number is now two months into
the rear view mirror and much more current data is suggesting the 2nd
Quarter GDP may rebound back into positive growth.
International markets followed US markets
higher in May led by a 3.5% jump by the Emerging Markets region, a 3.3% gain in
the Asia/Pacific region, a 1.9% improvement in the European-focused STOXX 600,
and the broad Dow Jones Global ex-US index grew 1.6%.For the year the DJ Global ex-US index is up
2.7%, the STOXX 600 is up 4.9%, the Emerging Markets region has gained 2.4%,
the Asian/Pacific region is up 0.9%.
Within the Commodity sector Gold fell
$45.90 (-3.8%) per ounce in May closing at $1246.00.Despite the decline in May, Gold is still up
$43.00 (+3.6%) for the year.I have been
reporting recently that food prices have been rising because of poor weather
early in the year; however, Corn and Wheat fell significantly in price during
May (-12.5% and -8.1% respectively) although both remain up for the year.I believe it is too early to see if the lower
prices will work their way into reduced prices for many of the foods we
consume, but if this trend holds, I think it is possible to expect cheaper food
prices down the road.
Interest rates continue to slide.The yield on the 10-Year US Treasury fell 17
basis points (one basis point is equivalent to 0.01%) in May to close at 2.47%
on Friday.As yields have fallen, the Barclays
US Aggregate Bond index has moved up in value adding 1.2% in May and 4.1% for
the year.A couple of years ago I read
an article in the Wall Street Journal that opined that of all major economic
indicators, interest rates were the hardest to predict.So hard in fact that not only did the vast
majority of economists incorrectly forecast the size of the change in interest
rates, they could not even predict the direction
of change!2014 is proving to be no
different.Most economists thought rates
were clearly headed up with the expected start of tapering (reduction in bond
purchases by the Federal Reserve and ultimately ending the program).The Fed has started tapering just as
anticipated; however, rates have not followed expectations and have
fallen.I believe this has happened
because real growth in the US economy continues to stagnate.I would like to see rates rise slowly and
steadily because that would signal a growing economy beyond the low to mid 2%
growth rate we have experienced for so many years now.
FOLLOW-UP TO MY COMMENTS ON INFLATION EARLIER THIS MONTH
of my favorite economists are Brian Wesbury of First Trust Advisors and Scott
Grannis who writes the Calafia Beach Pundit.They are my favorites because, in my opinion, they get it right much
more often than they get it wrong.They
also look dispassionately at the economy unlike some economists who might be
influenced by politics or other external, non-economic factors.Because they are so good, I frequently share
their thoughts with you to help you understand what is going on and this week
is no exception.
Wesbury and Grannis have been bullish on the economy and markets for the past
five years.They have said, and are
currently saying that the markets are not on the verge of another recession or
collapse even though other media outlets and economists have been calling for
just such a pullback.Their points of
view in the recent past and today are further substantiated by the market data
I receive from DorseyWright & Associates.The US Stock major asset category remains firmly in control and has
shown no weakness or signs of breaking down.This does not mean there will not be ups and downs along the way—a
straight upward stock market does not exist; however, it does appear to me that
factors that could contribute to a rising market are emerging.With this background in place, I found their
most recent comments very interesting.
each said it differently, their conclusions were roughly the same: the US stock
market is not overvalued and there are early signs that the supply of money in
the economy could be increasing.This in
turn will help push asset prices (including stocks, real estate, and
commodities) higher.They also feel that
over the short-term inflation will remain in check; however, as the supply of
money increases in the economy, the risk for inflation will grow with it.In short, we may be at the beginning of
another upward movement in the stock market, which for the first time in recent market history, could be helped by more
money coming into the markets—the proverbial “sugar high” some commentators
have said already exists. This is good
news for now, but both gentlemen caution the Fed will have a difficult task to
keep the economy expanding while holding the inevitable rise in interest rates
to a reasonable pace.If the Fed gets it
wrong and asset values get far ahead of themselves, we could see another nasty
correction at some point in the future.It is far too early to know if the Fed will be up to the challenge.
will conclude this section by sharing with you a couple of the key indicators
that I will be watching as we continue on this journey.First, I will watch how the Money Market Fund
category ranks overall in the DorseyWright list of fund categories.Currently the Money Market Fund category sits
at 130 out of 134.Should the ranking
rise, it is an early sign of a weakening of most asset classes.Second, I will be watching the US Dollar
index.The US Dollar index compares the
US Dollar to a basket of six foreign currencies with the Euro (58%) and the
Japanese Yen (14%) the largest holdings followed by the British Pound, Canadian
Dollar, Swedish Krona, and the Swiss Franc.A weakening US Dollar could be an indicator that more US Dollars are
flowing into markets and anytime you have more of something (supply), supply
and demand basics tell you that all things being equal, the price of that asset
will fall.Finally, I will be watching
the Price/Earnings (P/E) ratio of the S&P 500.In simple terms, the P/E ratio represents how
much an investor is willing to pay for $1 of earnings.In the past, when P/E ratios have moved
significantly above their averages it has often been a warning sign that too
many dollars were chasing stocks and pushing prices up beyond the true value of
a stock/company.According to Bloomberg,
the current P/E ratio is 17.6 compared to the 55-year average of 16.6.The current P/E ratio is slightly elevated,
but not in any meaningful or harmful way.
I continue to believe that
the economy (1st quarter not withstanding) will continue to plod
along.There are early signs that some
of the excess US Dollars sitting in bank reserves may be finding their way into
the economy increasing the risk for asset price inflation.For asset investors I believe this will
initially be a positive but again increases the risk of a meaningful asset
price correction some time in the future.
I am maintaining my broad
guidance.I favor US stocks overall of
the six major asset classes I follow.Within US stocks I prefer small and middle capitalization companies over
large cap.Looking at the major economic
sectors, the Materials and Financials sectors are now favored.I should point out that from a pure
performance perspective (as compared to relative strength which is slower to
move) Real Estate, Utilities, and Energy continue to be the best performing
sectors while Consumer Discretionary the weakest.
The International stock asset
class still ranks number two of the six major asset classes.I am liking this category more as
international stocks are sharing in growth along with US stocks, and I am
beginning to add positions again to the international asset class.I am pulling back from my outright ban on the
Emerging Markets region and will be looking to selectively add to this category
Bonds have shown some life
with the pullback in interest rates.I
continue to like the High Yield bond sector, however, I am going to begin trimming
my Floating Rate positions and increasing my exposure to the Multi-Sector bond sector.
Gold has taken a bruising
lately and I have not been favoring this commodity sector for sometime and I
still do not.The Energy sector is my
favored Commodity asset class investment area.
Two of the major exonomic reports being released next week are the May ISM Manufacturing index (June and the May Employment Situation report (June 6th). The ISM Manufacturing index is expected to show continued modes expansion manufacturing in the US, while consensus of the Employment Situation report is for the creation of 213,000 non-farm payroll jobs. This reflect adrop from the 288,000 jobs created in April, but 213,000 jobs would still be considered a good report.
I want to finish my
article by taking a moment to recognize the upcoming 70th
anniversary of the invasion of France at Normandy on June 6, 1944.As a professional soldier and former
paratrooper I have the highest admiration for the soldiers, sailors and airmen
who overcame so much and sacrificed even more to free the French and help rid
the world of Hitler.I have vivid
memories of walking the beaches of Normandy on June 6, 1964 and staring out at
the great expanse of Omaha Beach in front of me as I looked up to the bluffs
which had been full of German soldiers just 20 years before.Even as a young boy I could comprehend in a
small way what it must have been like on that fateful day so long ago.Please take a moment to reflect on the
sacrifice of those men and honor their memory.
Paul L. Merritt,
MBA, C(k)P®, AIF®, CRPC®
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Past performance is not indicative of future results and there is no
assurance that any forecasts mentioned in this report will be obtained.
Technical analysis is just one form of analysis. You may also want to
consider quantitative and fundamental analysis before making any investment
Information in this update has been obtained from and is based upon
sources that NTrust Wealth Management (NTWM) believes to be reliable; however,
NTWM does not guarantee its accuracy. All opinions and estimates constitute
NTWM's judgment as of the date the update was created and are subject to change
without notice. This update is for informational purposes only and is not
intended as an offer or solicitation for the purchase or sale of a security.
Any decision to purchase securities must take into account existing public
information on such security or any registered prospectus.
Emerging market investments
involve higher risks than investments from developed countries and involve
increased risks due to differences in accounting methods, foreign taxation,
political instability, and currency fluctuation. The main risks of
international investing are currency fluctuations, differences in accounting
methods, foreign taxation, economic, political, or financial instability, and
lack of timely or reliable information or unfavorable political or legal
The commodities industries can be significantly affected by
commodity prices, world events, import controls, worldwide competition,
government regulations, and economic conditions. Past performance is no
guarantee of future results. These investments may not be suitable for all
investors, and there is no guarantee that any investment will be able to sell
for a profit in the future.The Dow
Jones UBS Commodities Index is composed of futures contracts on physical
commodities.This index aims to provide
a broadly diversified representation of commodity markets as an asset class.The index represents 19 commodities, which
are weighted to account for economic significance and market liquidity.This index cannot be traded directly.The
CBOE Volatility Index - more commonly referred to as "VIX" - is an
up-to-the-minute market estimate of expected volatility that is calculated by
using real-time S&P 500® Index (SPX) option bid/ask quotes. VIX
uses nearby and second nearby options with at least 8 days left to expiration
and then weights them to yield a constant, 30-day measure of the expected
volatility of the S&P 500 Index.
TIPS are U.S. government securities designed to protect investors
and the future value of their fixed-income investments from the adverse effects
of inflation. Using the Consumer Price Index (CPI) as a guide, the value of the
bond's principal is adjusted upward to keep pace with inflation. Increase in
real interest rates can cause the price of inflation-protected debt securities
to decrease.Interest payments on
inflation-protected debt securities can be unpredictable.
The NYCE US Dollar Index is a
measure that calculates the value of the US dollar through a basket of six
currencies, the Euro, the Japanese Yen, the British Pound, the Canadian Dollar,
the Swedish Krona, and the Swiss franc.The Euro is the predominant currency making up about 57% of the basket.
Currencies and futures generally
are volatile and are not suitable for all investors.Investment in foreign exchange related
products is subject to many factors that contribute to or increase volatility,
such as national debt levels and trade deficits, changes in domestic and
foreign interest rates, and investors’ expectations concerning interest rates,
currency exchange rates and global or regional political, economic or financial
events and situations.
Corporate bonds contain elements
of both interest rate risk and credit risk. Treasury bills are guaranteed by
the U.S. government as to the timely payment of principal and interest, and if
held to maturity, offer a fixed rate of return and fixed principal value. U.S.
Treasury bills do not eliminate market risk. The purchase of bonds is subject
to availability and market conditions. There is an inverse relationship between
the price of bonds and the yield: when price goes up, yield goes down, and vice
versa. Market risk is a consideration if sold or redeemed prior to maturity.
Some bonds have call features that may affect income.
The bullish percent indicator (BPI) is a market breath
indicator. The indicator is calculated by taking the total number of
issues in an index or industry that are generating point and figure buy signals
and dividing it by the total number of stocks in that group. The basic
rule for using the bullish percent index is that when the BPI is above 70%, the
market is overbought, and conversely when the indicator is below 30%, the market
is oversold. The most popular BPI is the NYSE Bullish Percent Index,
which is the tool of choice for famed point and figure analyst, Thomas Dorsey.
All indices are
unmanaged and are not available for direct investment by the public. Past
performance is not indicative of future results. The S&P 500 is based on
the average performance of the 500 industrial stocks monitored by Standard
& Poors and is a capitalization-weighted index meaning the larger companies
have a larger weighting of the index.The S&P 500 Equal Weighted Index is determined by giving each
company in the index an equal weighting to each of the 500 companies that
comprise the index. The Dow Jones Industrial Average is based on the
average performance of 30 large U.S. companies monitored by Dow Jones &
Company. The Russell 2000 Index Is
comprised of the 2000 smallest companies of the Russell 3000 Index, which is
comprised of the 3000 biggest companies in the US.The NASDAQ Composite Index (NASDAQ) is an
index representing the securities traded on the NASDAQ stock market and is
comprised of over 3000 issues.It has a
heavy bias towards technology and growth stocks.The STOXX® Europe 600 is derived
from the STOXX Europe Total Market Index (TMI) and is a subset of the STOXX
Global 1800 Index.With a fixed number
of 600 components, the STOXX Europe 600 represents large, mid, and small
capitalization countries of the European region.The Dow Jones Global ex-US index represents 77 countries and
covers more than 98% of the world's market capitalization. A full complement of
subindices, measuring both sectors and stock-size segments, are calculated for
each country and region.