Market Digest – Week Ending 6/5
Stocks and bonds posted losses for the week. A strong jobs report Friday means the Fed may be more likely to raise rates later this year. Meanwhile, the Greek debt crisis churned on without much progress. Greece opted to pay its IMF obligations due in June in a lump sum. The move was largely considered appropriate to gain more time to negotiate but some saw it as an indication of greater problems. Bond selling accelerated as investors digested recent increases in yields. The US Aggregate Bond market is now slightly negative for the year.
S&P 500: 2,093 (-0.7%)
FTSE All-World ex-US: (-1.5%)
US 10 Year Treasury Yield: 2.40% (+0.27%)
Gold: $1,171 (-1.6%)
USD/EUR: $1.112 (+1.1%)
• Monday – An ISM manufacturing index rose, suggesting the US economy continues to grow and providing a boost for the dollar.
• Monday – Apple is said to be planning a music streaming service amid declining download sales. It is expected to cost $10 per month and compete directly with Spotify.
• Tuesday – Major oil executives promoted increased production of gas in order to reduce consumption of coal.
• Tuesday – Greece’s creditors completed a reform and bailout plan which could amount to something close to a take it or leave it deal.
• Wednesday – OPEC oil ministers expressed optimism about pumping more oil and fighting to gain market share, suggesting supply will remain high.
• Thursday – DISH Network is said to be merging with T-Mobile.
• Thursday – Greece said it would bundle its June payments to the IMF into one lump sum at the end of the month rather than make smaller payments as originally scheduled.
• Friday – The US added 280,000 jobs in May, and estimates for March and April were increased. Average wages rose 2.3% from a year ago. The strong report led many to believe a Fed rate hike in September is now more likely.
Bonds are having a rough quarter. The US Aggregate Bond market is down over 2% and those holding 30 Year Treasuries are down over 10%. International Bonds are also losing value. These numbers don’t seem big compared to typical stock volatility (stocks have been strangely calm lately), but bond investors generally value stability, and the losses will be noticed if the quarter ends in the red.
Meanwhile, mainstream media is just now starting to increase discussion about the risk of bonds after a lull since the “taper tantrum” in 2013. This could lead to more selling pressure. Rates are higher than they were at the beginning of the year, but still very low on an absolute basis or compared to historical averages. So there is risk.
Our view remains the same. Bonds are a valuable part of most portfolios. In the next five years, bonds will likely have one or two negative years, but if rates rise, higher yields will start to help. Over time, bonds are highly likely to have better returns than cash and should continue to provide excellent diversification benefits when paired with stocks. Unfortunately, we don’t know a good way to predict which of the coming years will be the good ones or the bad ones. It is a fool’s game to try. Economists have had better luck predicting stock markets, and that isn’t saying much.
But it is important to be deliberate what bonds to own. Some long duration bonds are ok, but the whole portfolio should be a mix. Some high yield corporate and emerging markets exposure makes sense. We’ve maintained a meaningful exposure to inflation protected bonds (TIPS). They didn’t perform well the last few years, but are outperforming so far in 2015. With wage growth starting to show signs of life, we feel better having some inflation protection.
For both stocks and bonds, be prepared for volatility to increase in the second half of the year.
Craig Birk, CFP®
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