Fed Discusses Stimulus Reduction; Bonds Up Modestly

in Market Commentary by

Market Digest – Week Ending 8/9

The S&P 500 declined just over 1%, retreating below the 1,700 mark after crossing it for the first time last week. Selling pressure was driven by two Fed official’s comments that stimulus reduction could begin as early as next month. A strong export activity report from China provided an encouraging sign that a sharp slowdown there may be avoided. Bonds were up modestly.

Weekly Returns:
S&P 500: 1,691 (-1.1%)
FTSE All-World ex-US: (+0.0%)
US 10 Year Treasury Yield: 2.58% (-0.02%)
Gold: $1,314 (+0.1%)
USD/EUR: $1.334 (+0.5%)

Major Events:

  • Monday – The Obama administration overturned an International Trade Commission ruling against Apple, introducing a new dynamic in global patent wars.
  • Tuesday – Chicago Fed President Charles Evans said the central bank may curtail its bond-buying program at its September policy meeting.
  • Wednesday – President Obama cancelled a scheduled meeting with Russian President Putin as a result of Russia granting NSA security leaker Edward Snowden temporary asylum.
  • Wednesday – Tesla Motor Company exceeded earnings expectations and said it sold over 5,000 of its Model S sedans.
  • Thursday – July trade data showed stronger-than-expected global demand for China’s exports, reducing concern about a slowdown in the Chinese economy.
  • Friday – President Obama on Friday announced plans to overhaul a secret national security court and pledged to disclose more information about secret NSA programs.

Our Take:
Tesla shares were up 10% this week and the company is now worth $17 billion. It is quite a sum considering the company is only selling about 20,000 cars per year. Ford and GM each sell this amount every three days. Justified or not, the high valuation will allow Tesla to pursue aggressive growth goals including building more charging stations. Sometimes, the stock market acts as a bit of a self-fulfilling prophecy.

Our interest lies not so much with Tesla but with the broader implications of the proliferation of electric cars. Bob Lutz, the former Vice Chairman of GM recently said he thinks electric cars will struggle to reach 10% market share in the next 10 years. But even at 10%, this would be a huge change. A 10% marginal decline in demand for retail gasoline could lead to a much larger decline in prices. That would be bad for oil companies but good for consumers and the overall economy.

The Tesla Model S reminds me a bit of the iPhone when it first came out. You would see one here and there and they seemed cool, but it was hard to envision how quickly and dramatically it would change the world. Electric cars aren’t affordable to the mass market yet and there is little chance they will have similar market share as smart phones in the next 25 years. But they may be more important than most people realize, especially their impact on stock portfolios.

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Craig Birk, CFP®

Craig Birk, CFP®

Craig Birk is a member of the Personal Capital Advisors Investment Committee. He also serves as Vice President of Portfolio Management. Prior to Personal Capital Advisors, he was an integral leader within the portfolio management team at Fisher Investments. During Craig’s time there, the company increased assets under management from $1.5 billion under management to over $40 billion. His responsibilities included risk management, portfolio implementation oversight, and management of all securities and capital markets research analysts. Mr. Birk graduated from the University of California at San Diego and has earned the Certified Financial Planner® designation.

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