June 9, 2014
Weekly Market Commentary
June 9, 2014
“Is there any point to which you would wish to draw my attention?”
“To the curious incident of the dog in the night-time.”
“The dog did nothing in the night-time.”
“That was the curious incident,” remarked Sherlock Holmes.”
Sometimes, it’s what doesn’t happen that deserves our attention. In the case of what’s missing in U.S. markets, according to The Economist, is volatility:
“Certainty about monetary policy has stripped volatility out of bond yields which in turn has drained a major source of uncertainty out of stock prices. At root, volatility simply represents uncertainty about the value of an asset's cash flows, so when volatility falls, the risk premium required to hold the asset also falls, driving price-earnings ratios for stocks up and bond yields down… I do worry that by squeezing out short-term volatility, we may be storing up long-term volatility.”
In the United States, the CBOE Volatility Index (VIX), a.k.a. the fear gauge, has been falling for some time. According to Reuters, some experts believe when the VIX trades below its historic averages, the market is getting toppy and investors may be in denial. Only time will tell whether this view has merit. In the meantime, let’s review what has happened so far during the second quarter of 2014:
Strength in America
The U.S. Federal Reserve continued to goose the U.S. economy with accommodative monetary policy. Toward the end of this quarter, the Fed was buying $45 billion of Treasury and mortgage-backed assets each month rather than $85 billion as it did prior to tapering. At this rate, its quantitative easing efforts will end in late fall or early winter.
The U.S. economy appeared to rebound after contracting slightly during the first quarter of 2014. Better-than-expected economic data late in this quarter spurred optimism in markets across the globe.
Redirection in Russia
Tensions between Russia and Ukraine remained high. At the St. Petersburg International Economic Forum, Russian President Vladimir Putin told CNBC, “The standoff with Ukraine and the threat to European gas supply are ‘not due to Russia but to the situation in the Ukraine, which abuses its position.’”
Meanwhile, one of Russia’s large state-backed energy companies signed a $400 billion, 30-year contract to supply gas to China. Reuters reported China received a significant discount on the deal which was priced at about $10 to $10.50 per million British thermal units (BTUs). This is well below the current price level of around $13 per million BTUs.”
Not long after that deal was announced, Russia, Belarus, and Kazakhstan signed documents creating a Eurasian Economic Union (EEU) late in this quarter. The Diplomat reported Russia was pushing for a common parliament, common passport, and common currency within the EEU; however, the other member states preferred a purely economic union. According to Reuters, forming closer ties between Russia and China is at the heart of the EEU.
Slow growth in China
China missed its government’s gross domestic product (GDP) growth target for the first quarter of 2014. The bull’s eye was 7.5 percent growth. China delivered 7.4 percent. The Chinese government took measures to encourage growth, and The World Bank recently reported China’s growth is expected “to slow to 7.6 percent in 2014, and 7.5 percent in 2015, from 7.7 percent in 2013.” The report said economic growth could be slower due to high levels of local government debt, issues in real estate markets, or economic weakness in developed countries.
WE'VE ALL TALKED ABOUT SPENDING TIME, BUT HOW MANY PEOPLE really think of it as currency? The Economist offered an interesting commentary on the value of time last week or, more accurately, on the hidden cost of wasted time. It seems two billion people around the world have watched the Korean music video “Gangnam Style” on YouTube. The Economist commented, “At 4:12 minutes, that equates to more than 140 million hours, or more than 16,000 years.” That’s about how long it would take to build:
- 20 Empire State buildings
- 4 Great Pyramids of Giza
- 6 Burj Khalifas (skyscraper in Dubai, United Arab Emirates)
- Another Wikipedia (write and edit all revisions)
So, was that time poorly spent? The Economist pointed out the opportunity cost was fairly high. The opportunity cost of a choice (watching a music video instead of doing something else) is equal to the value of the choice that has not been made. Of course, if watching the video gets the creative juices flowing and inspires an invention or innovation then, depending on how profitable the idea is, the opportunity cost may be negligible.
Weekly Focus – Think About It
“Most folks are as happy as they make up their minds to be.”
--Abraham Lincoln, 16th American President
Suzanne H. Christian, CFP®
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.
Suzanne Christian is a Registered Representative with and 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.
- Government bonds and 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. However, the value of fund shares is not guaranteed and will fluctuate.
- Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
- The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.
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- 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 afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.
- 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 Total Return 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.
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- Consult your financial professional before making any investment decision.
- Stock investing involves risk including loss of principal.
- Best of Sherlock
- Economist- When moderation is no virtue (or click here)
- Yahoo Finance
- Market Watch
- CNBC- Asia equities higher on US economic optimism, ECB easing hopes
- CNBC- Putin: Russia looks East, will respect Ukraine poll
- The diplomat
- The Guardian
- World Bank
- Economist- The hidden cost of Gangnam Style (or click here)
- Brainy Quote