The Northern Star 05/14/18 Markets Post Week of Growth

Message from Jon

During 2018, we have noticed a few occurrences that may or may not end up being omens for the nearby future. For instance, in February we all witnessed and participated in a 10.8% correction in the markets. I would not say that it was this correction that was surprising but instead the velocity at which it occurred.

We have seen and are expecting the Federal Reserve System to raise interest rates in an attempt to combat inflation fears and a heating economy.

We are also experiencing an increase in volatility manifest in the markets which is causing big swings in investment values. This is exemplified by fluctuations like increased change in investment merit, often in the same investment, going from favored to un-favored and back to favored again. Becoming the new normal in the market, it can create a muting in the investors level of vigilance, which borders on complacency at times.

In addition to all of this, we are seeing an increase in geopolitical tensions which continues to add to the building fear and instability.

Why do I mention all of this in a way that appears relevant to investing?

What should your investments be if the market declines during the very same time that interest rates are on the rise? Stocks would be falling and so would bonds, so what then?

In a newsletter produced by Dividend.com, they raised a similar question. "For investors, this poses a problem. Many have simply forgotten about how dangerous steadily rising prices can be for your portfolio and your income." The article talks about inflation and its effects on investments and income. It specifically mentions how purchasing power becomes a problem in periods of rising prices (inflation). "Inflation impacts our returns and actually reduces them. During periods of rising inflation, stocks have actually shown poor real-adjusted returns while Treasury Bonds have been negative."

In the past newsletters, I have quoted Crestmont Research as well, indicating a near 0% chance of a greater than 7% return in investments and a higher percentage chance of 0-6% return.

These two pieces of information seem to be speaking of similar outcomes just in a different manner. Other like comments and concerns have also surfaced in past newsletters which bring to mind an old saying, "...if three people tell you that you're drunk, you better lay down!"

Have we gotten to a place where we need to take action? I do not think so, but we have arrived at a place to be thinking about it more and more every day.

Alternative investment behaviors and tools may be the key to survival here. We are currently researching what those might be and how they may benefit clients. "Use times that are quiet to prepare for times when they aren't," a quote from a teacher that has served me well.

*Next week, I will be in New Orleans at a conference and returning mid-week. Any emails may be returned with some delay.

Till we speak again,

Jon

Sources:

https://mailchi.mp/e6bf25f03736/the-fee-war-keeps-benefiting-investors-217569?e=ea7017e4e0
http://www.dividend.com/news/2018/05/13/what-really-happens-portfolio-with-rising-inflation/
https://www.crestmontresearch.com/  

Markets Post Week of Growth

WEEKLY UPDATE - MAY 14, 2018

On Friday, the markets closed the week gaining traction. The Dow had 7 days of consecutive growth, rising 2.34% - its largest weekly gain since March.[1]Meanwhile, the S&P 500 rose 2.41%, the NASDAQ jumped 2.68%, and the MSCI EAFE increased 1.41%.[2]

Various factors came together to support the growth. From geopolitical topics to strong corporate earnings, we'll focus on 3 key developments that drove movement.

1. Energy Shares Boosted by Iran Nuclear Deal Withdrawal

President Trump's decision on Tuesday to withdraw from the Iran nuclear deal helped push the energy sector higher. With the possibility of renewed sanctions on the horizon, the anticipation of a pullback from global oil supplies helped boost prices. Though oil prices fell from a 3½ - year high on Friday, it was the 2nd week of growth, driving energy shares to rise 3.8%.[3]  

2. Technology Sector Jumps Amid Strong Corporate Earnings

After the technology sector's months of stagnation - fueled in part by recent fears over privacy - it is now approaching all-time highs. Since April 25, the information technology sector has increased 9%. The movement is driving many investors to join the rally, while many analysts remain cautious.[4]Overall, the growth contributed 3.5%.[5]

This rally happened on the back of strong corporate earnings. Over 70% of total S&P 500 companies reported earnings growth that exceeded expectations. Last week's positive reports helped push the index past 50- and 100-day moving averages.[6]

3. Inflation Remains Steady

The Consumer Price Index (CPI), which measures the price of goods and services, rose only 0.2% for the month in April and 2.5% over the year. These reports both missed and met expectations, respectively.[7] The tepid growth caused some investors to worry that the Federal reserve would raise interest rates more quickly, as the U.S. dollar fell and held below its 2018 high.[8] Some analysts, however, believe that the missed expectations should ease the Fed's pressure to fast-track interest rates.[9]

Looking Ahead

We will continue tracking geopolitical developments - from potential actions against Syria, tariffs on Iran, and preparations for President Trump's upcoming meeting with North Korea's Kim Jong-un.[10] In addition, key discussions around the American Free Trade Act and trade relationships with China remain on the horizon.[11] We also will gain our first insights on how well consumer spending performed in the 2nd quarter.[12]

If you would like to discuss any developments or gain a clearer understanding of how these issues may affect your portfolio, contact us today. We are always here to help you make sense of your financial life and gain clarity for the road ahead.

ECONOMIC CALENDAR

Tuesday: Retail Sales, Housing Market Index
Wednesday: Housing Starts
Thursday: Initial Jobless Claims, Philadelphia Fed Business Outlook Survey, Bloomberg Consumer Comfort Index.

Notes: All index returns (except S&P 500) exclude reinvested dividends, and the 5-year and 10-year returns are annualized. The total returns for the S&P 500 assume reinvestment of dividends on the last day of the month. This may account for differences between the index returns published on Morningstar.com and the index returns published elsewhere. International performance is represented by the MSCI EAFE Index. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.