Expectations

We all have certain expectations and so does the market place. As each year progresses, expectations arise about the future inflation rate, the growth of the economy, consumer spending, and other such areas of interest. Based on these expectations, investors make decisions about what investments they want, when, and how. As real results come in, the expectation is compared to the result. Generally, if the result meets or exceeds expectations the response is good. If the result falls short of the expectation, the response is not good. Last week, a report was released showing that consumer spending, a key ingredient in moving the economy, did not meet expectations and the market dropped. The market moved lower due to fear that consumers had curtailed their overall discretionary spending for everything except automobiles. This week, a report was released indicating that consumer prices were rising and exceeding expectations, moving the market up. The market rose because higher prices are apparently taking hold, thus increasing the possibility of added profits for companies. Currently, we are at the end of a quarter, with a half year behind us and a half year to go. Earnings from various companies are very important to the market at this time as analysts attempt to figure out what will happen for the balance of the year. We closed the second quarter with both stocks and bonds down for the month of June. As of this writing, stocks have staged a dramatic recovery and bonds are moving into positive territory. This is all good news, but the markets are very susceptible to wide fluctuations, and earnings reports will continue to come in between now and early August. At this time, the economy appears to be growing stronger, the Federal Reserve will reduce purchases on bonds, and the U.S. deficit for the current fiscal year, which ends on September 31, will be substantially lower than expected. This is good news for the U.S. economy and the stock market. We as investors need to remember that short term shifts in investments will occur, and we must be patient and look at the long term. To me, the long term looks extremely good.
Ed Mallon

Double Down!

The month of June was unkind to both bonds and stocks, as both lost value during the month. From the beginning of May until last week, Barclays index, which tracks investment grade bonds, was down 3.77%. Some people are referring to this as a “blood bath”, which it certainly is not.
Back in 1994, we had what has come to be known as the “bond massacre” when bond values dropped 5.3%. Bonds, like stocks, do go up and down, but bonds pay interest, which helps offset losses. The reason for owning bonds is that, over the long-term, they are more stable and can offset significant losses in stocks. The portion of the bond market that was most adversely impacted was United States government notes with maturities of 10 years or longer. These bonds were down an average of 10.8% during that same period. The long-term investor knows that a knee-jerk reaction is not the best investment move. As occurs quite often with a big selloff, the pendulum swung back, with bond interest rates falling later in the month and the value of bonds beginning to grow, although not back to where they had been at the beginning of May.
While it is unusual, stocks and bonds can rise or fall at the same time. Such was the case in June as stocks also fell. Using the S&P 500 as our measurement, the index fell from 1666 on May 21st to 1573 on June 24th, a drop of 5.6%. It recovered to 1606 by the close of the stock market on June 28th. In many respects, the second quarter of the year returned the gains of the first quarter. What precipitated this selloff of both bonds and stocks was an assessment by the Federal Reserve Board that the economy was getting stronger and would be growing significantly in 2014 and 2015. In May, I indicated that I thought the market was ready for a 10% correction but not a bear market. Some bonds have produced that correction, as have some stocks. The long-term outlook seems bright.
Ed