Market Digest – Week Ending 5/20
Increasing expectation for a Fed rate hike in June created a choppy week for stocks, but no directional consistency. US stocks finished flattish for the week with international stocks modestly up. The dollar gained after Fed minutes and comments by non-voting Fed members suggested the central bank still intends to hike rates twice this year. Heightened M&A activity and higher oil prices helped support markets. Bonds and gold fell.
S&P 500: 2,052 (+0.3%)
FTSE All-World ex-US: (+0.6%)
US 10 Year Treasury Yield: 1.85% (+0.15%)
Gold: $1,252 (-1.6%)
USD/EUR: $1.122 (-0.8%)
• Monday – Pfizer announced that it would buy Anacor Pharmaceuticals for $5.4 billion.
• Monday – Berkshire Hathaway announced a $1 billion position in Apple.
• Tuesday – US consumer prices rose 2.1% in April from a year ago, but core prices excluding energy and food were relatively stable.
• Wednesday – Minutes from the Fed’s April meeting suggested a June rate hike remains a distinct possibility.
• Wednesday – The Obama administration passed a rule which will make millions of Americans earning up to $47,476 per year eligible for overtime pay.
• Thursday – Republicans and the White House agreed on a $70 billion debt restructuring for Puerto Rico.
• Thursday – Bayer was reported to be in talks to acquire Monsanto, but the outcome remains highly uncertain.
• Thursday – An Egyptian airliner carrying 66 passengers and crew crashed into the Mediterranean Sea. The cause of the crash is still unknown.
• Thursday – Phil Mickelson was ordered to pay back almost $1 million of gains on a stock trade involving Dean Foods but was not charged with any wrongdoing.
Today marks the one year anniversary of the last all-time high of the S&P 500. Since then, the index is down 3.5%. After dividends, that equates to a loss of around 1%. Meanwhile, an investment in the global stock market has resulted in a loss of roughly 8% in this time. This has been frustrating for global investors who are used to positive results after a seven year bull run.
But no one has ever derailed their retirement plan with a single digit loss. Many have by being scared out of the market and missing huge gains. A rise in the dollar this month has helped push US stocks back into the lead year to date compared to international stocks. This extends a long trend, but we caution investors not to give up on international stocks. By most valuation and fundamental measures they are now much more attractive than the US.
Historically, stocks are more likely to go up following a year of gains than following a year of losses. But average returns are still good when following losses. For those who measure results in periods longer than a month, we don’t think the Fed’s interest rate decision in June matters all that much. Slightly higher rates will make it a little harder to justify high equity valuations but a more normalized bond market would be a positive for most people planning for retirement. As always, it will be interesting.