Can’t Stocks and Bond Yields Just Get Along?

LPL Market ResearchSurging bond yields have not spooked stock market investors. The latest sharp move higher in bond yields has caused stock market investors to ask the question, At what point do higher interest rates potentially begin to hurt stock prices?

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What Does the High-Yield Sell-Off Mean for Stocks?

LPL Market ResearchHigh-yield bond weakness has led investors to fear that a recession or bear market may be forthcoming…Here we try to answer that question by looking at…

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No Debate: Stock and Bond Markets Agree

Weekly Market CommentaryStocks have been moving higher lately, seemingly suggesting that growth is improving; yet at the same time bond yields have been moving lower, implying growth prospects are deteriorating. The big debate between which of these two multi-trillion dollar markets is right has been raging among investors. But the truth is that there is no debate here — at least not yet…

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Bumps on the Slope

Dear Valued Investor:

It’s not often that we can gain investment insights from an 18-year-old wunderkind.

Many of us marveled at the performance of American Mikaela Shiffrin at the Sochi Winter Olympics, where she became the youngest Olympic slalom champion. What makes Shiffrin remarkable is not only her success, but also her approach to the sport. Unlike many of her peers, while training she focused more on technique and practice — the discipline of ski racing — rather than on competing. When Shiffrin lost footing and became airborne on the course, she was able to regain her position quickly as she had practiced her recovery many times before. Throughout all of her training, she took the long-term view.

It can be difficult to take the long-term view in investing, particularly when we are challenged by bumps on the slope.

February, for example, provided investors with mixed signals. Colder and snowier-than-usual weather adversely affected many economic reports, causing uncertainty over the health of the economy to linger. Several high-profile companies also cited the negative impact of weather on future earnings.

Looking at the bigger picture, however, helps us regain our sense of balance. U.S. stock prices appear to be looking past weather disruptions and have rebounded back to near record highs following a soft start to the year. We see underlying strength in most economic indicators including a continued recovery in the housing market, which is supported by easier mortgage availability, limited home inventory, and near-record housing affordability. Absent a severe storm in March, we expect more clarity on the health of the overall U.S. economy in April, when March economic data are released, and we still expect economic growth, as measured by real gross domestic product (GDP), to reach 3% in 2014, based upon many of the drags of 2013 fading, including U.S. tax increases and spending cuts and the European recession, and growth accelerating from additional hiring and capital spending by businesses.

The bond market also hit some bumps, as Puerto Rico was downgraded during the month by all three major credit rating agencies as a result of its large debt burden and multi-year recession. But municipal bond market investors have been thinking longer term and appeared to take the downgrades in stride by noting Puerto Rico is not reflective of the overall market. Just last week, the broader bond market appeared to corroborate the move in stock prices by ignoring another batch of weather-impacted data and anticipating better growth. Bond investors also refocused on a Federal Reserve that remains on schedule to reduce bond purchases and eventually raise interest rates in late 2015.

Policymakers in Washington, D.C. appear to be taking the longer view as well by focusing less on partisan differences and more on overall economic health. Congress agreed to a “clean” debt ceiling increase without links to the Affordable Care Act or the Keystone XL pipeline. This “clean” bill acted as a positive for the stock market, which may have rallied on the perception that a more business-friendly legislative environment may be developing. We continue to expect a 10-15% gain for U.S. stocks in 2014, as measured by the S&P 500 Index. (Derived from earnings per share for S&P 500 companies growing 5 – 10% and a rise of half a point in the price-to-earnings [PE] ratio.)

As we look back at the concerns we’ve had during the past month, we realize — just as Mikaela Shiffrin did on her gold medal run — that we’ve been here before. We know we can trust the discipline and practice of sound investing and stay focused on our long-term goals. Even those of us who are industry veterans can take a lesson from the young champion.

As always, if you have questions, I encourage you to contact me.

Sincerely,

T. Vance Walker

Director of Investment Services

LPL Financial Advisor

Jax Federal Investment Services

 

562 Park Street | Jacksonville, FL 32204

904.475.8261 | 800.443.2664 x8261 | Fax 904.475.8006

vance.walker@lpl.com

www.tvancewalker.com

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult me prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The economic forecasts set forth in this letter may not develop as predicted.

This research material has been prepared by LPL Financial.

Municipal Rush

Municipal RushThe bond market is off to a strong early start — particularly municipal bonds. Valuations, lower yields, and the upcoming difficult March period suggest the current pace of municipal bonds is not sustainable. We believe municipal bonds will stay on track for…

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Getting the Message

Getting the MessageThe Federal Reserve (Fed) will have one more attempt to craft its message to the bond market as the 2013 event calendar winds down this week with the Fed’s final meeting of the year. With the thinly traded markets that typically accompany the holidays, we believe the Fed will wait until 2014 before announcing…

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