Financial Market UpdateStrategicPoint of View®
March 29, 2010
Welcome to the StrategicPoint of View -- a market and economic overview of what occurred last week, what's up for this week, and our commentary on the economy and current market activity in general for “Making Money” listeners.
LAST WEEK
Home sales were disappointing, durable goods orders were positive, unemployment claims dipped for the fourth straight week, and 4th quarter GDP was revised to 5.6%.
S&P 500: 1167 (up 0.60% for the week and up 4.46% on the year)
Dow: 10,825 (up 1.01% for the week and up 4.05% on the year)
NASDAQ: 2395 (up .88% for the week and up 5.55% on the year)
10-year: 3.85% (from 3.69% last week)
Crude Oil (April): $80.17 (from $80.58 last week)
Gold (April): $1,104 (from $1,107 last week)
USD/Euro: $1.3415 (from $1.3541 last week)
THIS WEEK
The consumer is in focus as personal spending and income reports give us insight into spending habits. More manufacturing data comes from factory orders. And the all important monthly jobs number is released on Friday when the stock market is closed. Economists expect March to be the turnaround month for the labor markets, which will be boosted by census hiring. Watch for an early response in the bond markets, which remain open on Friday.
COMMENTARY
It was a weird week on Wall Street. Asset classes moved in unusual ways. Intraday volatility was back. And uncertainty reigned. But you wouldn’t know it from stock prices, which continued their slow but steady march higher.
This past week, the story was in the bond market, not the stock market. The interest rate on the ten year Treasury note jumped from 3.69% to 3.85%, after reaching 3.9% on Thursday. At the same time the dollar added one percent against the euro, with the European Union and the IMF reaching a tentative agreement on a rescue mechanism for Greece.
Both the dollar and treasury rates retreated mildly on Friday. But you have to ask: why love the dollar and hate Treasuries? Optimists say the technicalities were to blame: pessimists saw something more ominous. In our opinion, ‘technicalities’ miss the boat, and ‘ominous’ is a bit dramatic.
You would expect, with all of the sovereign debt troubles in Europe that investors would flock to U.S. Treasuries. Troubles force people to safe havens and away from risk. One complicating factor this past week, however, was that the U.S. added $118 billion in debt in 2, 5 and 7 year U.S. Treasury note auctions. Demand was underwhelming, at best, as the passage of health care legislation raised concerns over the ability of the U.S. to finance its ballooning budget deficit.
The ‘ominous’ view says that the bond market is staging a revolt over too much debt and will push rates high enough to cause a second stock market crash. Yet rates remain below 4% and are unlikely, at this stage of the recovery, to climb too far above 4% until the economy really turns around. How high is too high? It’s hard to tell. Loan costs increase with interest rate hikes, dampening corporate and mortgage demand for loans. However, 4% is still a historically low interest rate.
And then there is the case that moderately rising interest rates signal a positive outlook on the economy. Rates fall when the outlook is bearish for economic growth. Conversely, rates rise when investors see better times ahead.
Optimists cited interest rate swap re-pricing as the primary reason for the spike in interest rates. True, massive use of these popular derivatives did cause problems this week, but the reason was more technical than a reflection of a fundamental value of government debt.
This is not to minimize troubles for the US debt market. The message last week was very clear: deficits matter and longer term interest rates can be expected to adjust higher, in spite of short term interest rates being held steady by the Federal Reserve. The result? A steeper yield curve that is unlikely to flatten due to changes on the short end.
Meanwhile, the dollar is strong because investors are moving away from risk assets denominated in other currencies and moving into our currency. The dollar’s value is always relative to other currencies. Given European woes and the fact that the dollar is still 8% below its strongest level of 2009, the dollar is likely to continue climbing at the expense of the euro for a while, irrespective of concerns over US debt.
Ominous? No. Of concern? Yes. Any sudden change in interest rates deserves close attention. Our advice: watch those bond holdings – keep them on the shorter end of the yield curve. That way, you won’t feel as vulnerable to a fluctuating interest rate environment.
Tune in to News Talk 630 WPRO and 99.7 FM daily for our "Making Money Updates". Get the latest market news and our take on the day's events with our market commentary at 8:10am and 5:32pm. For more information, visit www.StrategicPoint.com.
*Past performance is not indicative of future results. Indices are unmanaged and you cannot directly invest in them. The Nasdaq Composite Index measures all NASDAQ U.S. and non-U.S. based common stocks listed on the Nasdaq Stock Market. The S&P 500 index is based on the average performance of 500 industrial stocks monitored by Standard and Poor’s. The data referred to above was taken from sources believed to be reliable. StrategicPoint Investment Advisors has not verified such data and no representation or warranty, expressed or implied, is made by StrategicPoint Investment Advisors.
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