Mixed Growth Expectations Stoke Volatility Weekly Update – July 28, 2014

Image courtesy of FreeDigitalPhotos.net/suphakit73

Image courtesy of FreeDigitalPhotos.net/suphakit73

Markets ended another volatile week mixed, pummeled by concerns about global growth but buoyed by better-than-expected earnings results. For the week, the S&P 500 ended flat, the Dow lost 0.82%, and the Nasdaq gained 0.39%.1

As of last Friday, just under half the S&P 500 companies had reported earnings, and the vast majority (69% and 63%, respectively) had beaten both earnings and revenue expectations.2 Though there were some high profile-earnings misses, the overall picture seems to be one of redemption and resilience. The percentage of better-than-expected results are up from the first quarter, meaning company growth likely accelerated; it’s also a good sign for future expectations, given that the economy is doing much better overall than it did earlier in the year.

That being said, some red flags about economic growth were raised last week. Mixed business spending data – a core component of Gross Domestic Product (GDP) calculations – may erode Q2 economic growth. While businesses spent more on core capital goods like computer equipment and automobiles, the value of shipments declined for the third month in a row, which led the International Monetary Fund to cut its 2014 U.S. growth forecast.3 On the other hand, durable goods inventories rose 0.4%, which is a great improvement over the slow inventory growth that contributed to the Q1 economic contraction.4 We’ll know more after this week’s official GDP report.

The week ahead may be the busiest of the summer, with over 140 S&P 500 companies releasing earnings.5 The Federal Reserve Open Market Committee meets on Tuesday and Wednesday to ponder next steps in monetary policy. Will they announce another $10 million taper to bond purchases? Probably. But, their comments will tell us a lot about how they feel about the economy.

The economic calendar is also full of major reports. Traders will get their first look at official Q2 GDP numbers on Wednesday as well as the July Employment Situation report on Friday. Given global worries about economic growth, we can expect some volatility as traders hedge their bets ahead of the data.

ECONOMIC CALENDAR:

 

Monday: Pending Home Sales Index, Dallas Fed Mfg. Survey

Tuesday: S&P Case-Shiller HPI, Consumer Confidence

Wednesday: ADP Employment Report, GDP, EIA Petroleum Status Report, FOMC Meeting Announcement

Thursday: Jobless Claims, Employment Cost Index, Chicago PMI

Friday: Motor Vehicle Sales, Employment Situation, Personal Income and Outlays, PMI Manufacturing Index, Consumer Sentiment, ISM Mfg. Index, Construction Spending

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HEADLINES:

Stiffer sanctions rattle Europe. The prospect of new sanctions against Russia over the crisis in Ukraine is shaking European confidence over economic growth. Europe is Russia’s biggest trading partner, and sanctions could bite deeply into European growth.6

New home sales drop sharply. Sales of new single-family homes fell 8.1% in June to the lowest level since June 2013; May numbers were also revised downward, suggesting that the housing market is still losing steam.7

Nationwide, layoffs are rarer. Improving economic prospects and confidence among employers is translating to fewer layoffs, as evidenced by the lowest levels of new unemployment applications seen since 2006. Will this be a turning point in the labor market recovery?8

Consumer inflation rises. Consumer prices, a measure of inflation, rose in June with skyrocketing gasoline prices. However, core inflation, which excludes volatile categories like food and fuel, remained consistent with a gradual increase due to healthy economic expansion.9

Markets Shake Off Global Worries Weekly Update – July 21, 2014

Image courtesy of FreeDigitalPhotos.net/Vlado

Image courtesy of FreeDigitalPhotos.net/Vlado

Despite a tumultuous week that had it all – earnings, volatility, geopolitical shock, and monetary policy news – markets were still able to chalk up a win. For the week, the S&P 500 gained 0.54%, the Dow grew 0.90%, and the Nasdaq added 0.30%.1

Federal Reserve chair Janet Yellen gave semi-annual speeches on monetary policy before the House and Senate. She confirmed that quantitative easing would end after the October Federal Open Market Committee meeting if the economic outlook continues to look good. However, she dodged a key question about the timing of interest increases, indicating that the Fed is not yet ready to commit to a formal plan. Yellen cautioned that economic signals are somewhat mixed and predictions are never certain; however, she believes that underlying economic trends are largely positive.2

International events took center stage when a civilian airplane carrying several hundred passengers was shot down over Ukraine, allegedly by pro-Russian separatists with possible military support from Russia.3  International condemnation of the shocking event was swift, but it’s hard to know what will happen next. On the one hand, international outrage over the civilian deaths may ratchet up the sanctions on Russia. On the other hand, the importance of Russian trade ties with Europe argue for a more cautious approach, given how fragile the EU’s economy is right now. In the Middle East, the Israeli Defense Force moved ground troops into Gaza in an effort to quell the rocket attacks from Hamas. Despite international diplomatic efforts, hostilities between the two sides are escalating, fueling fears about instability in the Middle East.4

These global worries caused stocks to dive on Thursday, but better-than-expected earnings boosted investor sentiment, pushing stocks higher on Friday. So far, second quarter earnings are off to a good start, though it’s too soon to draw conclusions about the whole season. Thus far, we’ve heard from 45 S&P 500 companies, mostly in the Finance sector; overall, earnings are up 5.2% from Q2 2013, on 2.8% higher revenues.5  Again, while we can’t use these data points to predict earnings results from other companies, it’s a sign that investors’ optimism about the second quarter might be rewarded.

This week, earnings data and news from Ukraine and Israel will likely dominate market headlines, potentially stoking more volatility. On the earnings calendar this week will be reports from heavyweights like AT&T (T), Microsoft (MSFT), Starbucks (SBUX), and Apple (AAPL).

 

ECONOMIC CALENDAR:

 

Tuesday: Consumer Price Index, Existing Home Sales

Wednesday: EIA Petroleum Status Report

Thursday: Jobless Claims, New Home Sales

Friday: Durable Goods Orders

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HEADLINES:

Retail sales disappoint. June retail sales ticked up just 0.2%, held back by drops in restaurant, auto, and building sales. The anemic numbers suggest that consumers are still cautious about opening their wallets, which may hold back spending this year.6

Jobless claims fall unexpectedly. The number of Americans filing new claims dropped more than expected last week, showing that the labor market continues to improve. The number of people receiving continuing unemployment support is also at a seven-year low.7

Consumer sentiment dips. A preliminary reading of July consumer sentiment showed that consumer optimism about the future is faltering. While attitudes about current conditions are stable, low expectations may curb future spending.8

Home builder optimism surges. A key measure of home builder sentiment jumped in July, indicating that the nation’s builders are feeling more confident about their prospects. Respondents think improvements in the labor market and low housing supply will boost demand.9

5 Critical Financial Issues in Remarriages

Many Americans are in their second and third marriages. In fact, statistics from a 2012 book, The Remarriage Blueprint, suggest that nearly 40 percent of new marriages include at least one previously married spouse. Remarrying later in life can produce a number of complex financial, legal, and emotional matters that should be addressed as soon as possible. If you or someone you love is part of a blended family, we urge you to think about these important issues.

Be candid about your financial situation. Couples who are remarrying frequently have significant financial baggage. Being open and honest with each other about assets, debts, and obligations from a previous marriage can help avoid problems later on.

Consider the following questions:

  • What financial obligations are you bringing to the marriage?
  • How will you split living expenses and contribute to savings?
  • Do you plan to pool your finances?
  • Where will you live and who will own the house?
  • Who is on the mortgage?
  • How will your marriage affect college financial aid for your children?
  • What will you do if you need to financially support an adult child or elderly parent?

It’s very important to be able to have these conversations early and often in your marriage. If you find that you’re not on the same page or are worried about bringing up complicated issues, ask your financial advisor to help mediate your discussion and provide a neutral perspective.

Update life insurance, medical directives, and beneficiary designations. It’s unbelievably common for couples to forget to update important documents when they remarry. If you or your spouse dies without changing beneficiaries on a retirement account or life insurance policy, a significant part of the estate could go directly to a previous spouse, with no legal recourse. If you and your spouse have living wills, healthcare powers of attorney, or medical directives (and you should), review them with your attorney to make sure that these documents reflect your current wishes. If you don’t currently have an attorney, we can introduce you to one from our professional network.

Think about how remarriage affects your retirement planning. Some divorce settlements require retirement benefits to be split with an ex-spouse, which could reduce your income in retirement. In the event of your death, your current spouse might have to split survivor benefits with your ex-partner. Social Security benefits can also be affected. For example, if you are entitled to spousal or survivor’s Social Security benefits from a previous marriage, getting remarried might affect how much you are entitled to collect. Discuss these issues with your spouse and financial advisor to make sure that your retirement takes into consideration your change in financial circumstances.

Consider drafting a prenuptial (or postnuptial) agreement. While most Americans get married without a prenup, we believe that they are essential in a remarriage situation. In many cases, one or both spouses will have children from a previous marriage or have significant debts and assets. When developed by an experienced attorney, a financial agreement can help you protect yourselves and your heirs from the financial fallout of a divorce.

Discuss estate planning with your investment advisor and attorney. Estate planning can be emotionally and logistically complex in blended families, and it’s important to make sure that you and your spouse update your estate plans. It’s essential to discuss your estate plans if you want to make sure your children inherit rather than your current spouse or your spouse’s children.

Conclusions

Remarrying later in life is wonderful, but a new marriage can introduce many complex financial considerations. We strongly recommend discussing these issues with your spouse as early as possible to ensure that your financial health is protected and to help lay the groundwork for future conversations about money.

It’s also a good idea to speak with your investment advisor and attorney so that they can help you understand how your finances and legal situation will be affected by your marriage. If you have any questions about marital finances or any other issues surrounding blended families, please give us a call. We’re always happy to be a resource to you and those you love.

Markets Slump As Investors Wait for Earnings Weekly Update – July 14, 2014

Image courtesy of FreeDigitalPhotos.net/renjith krishnan

Image courtesy of FreeDigitalPhotos.net/renjith krishnan

Stocks checked their advance last week as investors weighed earnings reports and waited for more news. Worries at one of Portugal’s largest banks also contributed to mid-week losses. For the week, the S&P 500 lost 0.90%, the Dow fell 0.73%, and the Nasdaq dropped 1.57%.1

Markets took a dive in the middle of the week on news that one of Portugal’s largest banks may be in trouble. Investor concerns about a possible domino effect in the EU’s financial system were soothed by statements from European Central Bank officials, who claimed that only one bank was affected by financial irregularities.2 However, investors still used the opportunity to take some profits off the table.

Expectations about second quarter performance also set the tone for markets last week. While investors were willing to shrug off negative news in the first quarter because of the poor weather, their optimism has raised expectations for Q2 earnings and economic performance. So far, we haven’t seen enough data to draw any conclusions, but total Q2 earnings for S&P 500 firms are expected to be up about 3.00%.3

Economic news was scarce last week, but weekly jobless claims fell to one of the lowest levels since the last recession. While weekly numbers are always volatile, the four-week moving average also dropped to the second-lowest reading since August 2007.4 All told, it was a pretty good week for the labor market.

Earnings season kicks into high gear this week and reports will likely affect markets as investors discover whether their high hopes for second quarter performance bear out. Federal Reserve Chair Janet Yellen will also deliver her second semi-annual remarks on monetary policy before the House and Senate.5 Though we don’t expect any surprises, analysts will be digging into her comments for hints about when the Fed might raise interest rates.

ECONOMIC CALENDAR:

 

Tuesday: Retail Sales, Empire State Mfg. Survey, Import and Export Prices, Business Inventories, Janet Yellen Speaks 10:00 AM ET

Wednesday: PPI-FD, Treasury International Capital, Industrial Production, Housing Market Index, Janet Yellen Speaks 10:00 AM ET, EIA Petroleum Status Report, Beige Book

Thursday: Housing Starts, Jobless Claims, Philadelphia Fed Survey

Friday: Consumer Sentiment

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HEADLINES:

Wholesale inventories jump in May. Business inventories surged 0.50% from April as firms stocked up on autos, machinery, and lumber. Inventories are a key component of GDP calculations and gains in this area indicate that businesses could be restocking to cope with rising demand.6

Percentage of uninsured Americans drops. A recent Gallup poll shows that only 13.40% of Americans lack health insurance, a significant drop from mid-2013, when 18.00% of Americans were uninsured. This could be good news for the healthcare sector, which might see increased demand from the newly insured.7

Retail sector in a funk? Several retail chains have blamed weak earnings on sluggish demand, indicating that lower- and middle-income consumers may not be reaping the benefits of a growing economy.8

U.S. refineries struggle to keep up with oil production boom. Rapid increases in oil extraction means America is in the upper strata of global oil producers. However, limited refinery capacity is keeping domestic gas prices high.9

July 2014 Monthly Market Update

Special Quarterly Edition: Markets End Quarter on High Note Quarterly Update – July 7, 2014

Image courtesy of FreeDigitalPhotos.net/jscreationzs

Image courtesy of
FreeDigitalPhotos.net/jscreationzs

After a slow start to the year, the second quarter of 2014 may be a redemption story. Multiple indices reached new records and the S&P 500 logged its longest quarterly rally since 1998.1 For the quarter, the S&P 500 gained 4.66%, the Dow grew 2.56%, and the Nasdaq gained 4.46%.2

What are some of the factors that contributed to strong market performance in Q2?

Economic fundamentals were solid. Despite some gloomy first quarter Gross Domestic Product (GDP) results showing the economy contracted 2.9%, it appears that underlying fundamentals are returning to trend following the chilly winter. Retail and vehicle sales grew as consumers unlimbered their wallets.3 Manufacturing also picked up significantly after the winter slowdown, supporting the belief that the sector, which contributes 12.5% to GDP, is rebounding strongly.4

The employment picture is much brighter. The labor market hit an important psychological milestone by regaining all of the 8.7 million jobs lost in the recession.5 While demographic shifts and labor market growth mean that we haven’t yet hit full employment, job growth could be picking up speed. The June employment situation report showed the economy created 288,000 new jobs and the unemployment rate dropped to 6.1%.6 All told, roughly 800,000 new jobs were created last quarter, which is great news.7

The Federal Reserve has continued to express optimism about the economic recovery and is committed to wrapping up quantitative easing programs by this Fall.8 Much of the bull market we’ve seen for the last couple of years can be attributed to the Fed’s easy money policies and its commitment to supporting economic growth. Now that the country is finally on better footing, investors are taking comfort from the Fed’s readiness to take the training wheels off the economy and return to normal monetary policy.

What could act as headwinds in the weeks and months to come?

Geopolitical issues are on the radar as the security situation continues to deteriorate in Iraq and the crisis in Ukraine still simmers. Ukraine and Iraq play key roles in the natural gas and oil industries, respectively, and supply disruptions – or even just the threat of disruptions – could drive up prices and make investors skittish.

Rising food and energy prices may start to be felt in consumer spending.9 If Americans are taking hits to their pocketbooks, they may be less willing to spend, which could drag on the economy and financial markets.

Investor optimism is also very high, which can sometimes presage a market pullback as investors take profits and wait for better news. After flirting with the top for days, the Dow finally broke 17,000 last week for the first time in its 118-year history.10 Though we don’t put a lot of faith in technical indicators, 17,000 is a big psychological number and investors may become more cautious on the other side.

What does this mean for future market performance? Hard to say. Economic fundamentals going into the third quarter are strong, and if the earnings picture is bright, stocks could see some further upside. However, we can expect more volatility and possibly even a correction in the months to come. As always, it’s important to stay focused on long-term goals instead of short-term market performance.

ECONOMIC CALENDAR:

 

Wednesday: EIA Petroleum Status Report, FOMC Minutes

Thursday: Jobless Claims

Friday: Treasury Budget

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HEADLINES:

Vehicle sales accelerate in June. Sales of automobiles spiked unexpectedly last month, reaching an annualized rate of 16.98 million units. This is good news for the economy because it indicates that consumers are willing to purchase big-ticket items.11

June manufacturing jumps. June was a very strong month for manufacturing as domestic demand caused new orders to spike. Foreign demand for U.S. goods barely changed, indicating that global demand is still suffering.12

ECB unlikely to buy bonds. While the European Central Bank has committed to quantitative easing to boost stagnant growth in Europe, the organization will likely stop short of taking on the Federal Reserve-style bond purchases.13

IMF hints at global forecast cut. The International Monetary Fund may cut its global economic growth forecast, citing weak public and private sector demand. Weak global growth could spell trouble for U.S. firms who rely on exports for revenue.14

Markets Close Mixed Weekly Update – June 30, 2014

Image courtesy of FreeDigitalPhotos.net/stockimages

Image courtesy of
FreeDigitalPhotos.net/stockimages

Markets lost some momentum on slow trading and ended the week mixed. Despite the sluggish behavior, equities are up strongly for the quarter and the S&P 500 is poised for its longest rally since 1998.1 While the S&P lost 0.10% and the Dow fell 0.56%, the Nasdaq managed a gain of 0.68%.2

Economic data was largely unsurprising last week. A dismal first quarter GDP update didn’t faze investors who regarded it as old news. While Q1 GDP growth fell to -2.9%, investors blamed the contraction on the unusually cold weather and cuts to healthcare spending.3 On the other hand, lukewarm consumer spending in May caused economists to trim economic growth expectations for the second quarter. Despite the poor showing, analysts admitted that challenges in calculating healthcare spending might have artificially lowered spending numbers.4

On the geopolitical front, the Ukrainian government in Kiev signed historic free trade agreements with the EU, Georgia, and Moldova, integrating the economies of the three former Soviet-Bloc countries more closely with Europe, and potentially paving the way for future entry into the EU. The move immediately drew threats from Russian leaders, who are worried about losing control over their neighbors.5 Although the situation is far from resolved, we can hope that the threat of further economic sanctions will cause Russia to back down.

As the clock ticks down on the second quarter, investors are looking ahead for economic data to support hopes that economic activity picked up in the last three months. The short trading week is packed with economic releases, including the June Employment Situation report and a speech by Fed chair Janet Yellen.

ECONOMIC CALENDAR:

 

Monday: Chicago PMI, Pending Home Sales Index, Dallas Fed Mfg. Survey

Tuesday: Motor Vehicle Sales, PMI Manufacturing Index, ISM Mfg. Index, Construction Spending

Wednesday: ADP Employment Report, Factory Orders, EIA Petroleum Status Report, Janet Yellen Speaks 11:00 AM ET

Thursday: Employment Situation, International Trade, Jobless Claims, ISM Non-Mfg. Index

Friday: U.S. Markets Closed for Independence Day Holiday

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HEADLINES:

Federal student loan rates rise on July 1. Legislation that ties student loan rates to prevailing market rates means that federal loan rates will reset on July 1. Visit studentaid.ed.gov for more information on loan rates.6

Consumer sentiment rises in June. A final reading of June sentiment shows that consumers felt more optimistic about the economy in June and are upbeat about their future prospects. Hopefully, these positive feelings will be seen in higher Q2 consumer spending.7

Rising food and fuel prices drag on consumers. Rising demand, drought, and global oil uncertainties are causing prices on gasoline and food to rise around the country. Prices on meat, dairy, and even coffee are up, and producers are passing those costs on to consumers. If Americans continue to take a hit at the pump or grocery store, it could cause consumer spending to fall later this year.8

Sales of new and existing homes rise in May. Home resale’s rose more than expected in May and the inventory of properties was the highest it’s been in 1-1/2 years. New home sales skyrocketed to a six-year high, though the smaller sample size makes this measure more volatile. While it’s too soon to know for certain, these numbers suggest that the housing market may be recovering from its slump.9.10

 

Is It Actually a Good Idea to Pay Off a Low-Interest Mortgage?

Home loans frequently make up significant amounts of household debt, and reducing as much debt as possible before entering retirement can seem like a good idea. A 2013 survey found that 40% of Americans age 55 and older believe that paying off their mortgage was the smartest financial move they ever made.1 There’s also a certain peace of mind that can come from having one less bill to pay in your later years.

However, given today’s low interest rates, your mortgage may be the cheapest form of debt to hold, and it may make sense to use the extra money in different ways. Given the choice, should you pay down your low-interest mortgage as soon as possible, or use the extra income to save more aggressively?

As with so many things, the answer is: it depends. Everyone’s personal financial situation is different, and there are many factors to consider before making a decision about your mortgage.

Here are some questions to help guide your decision-making:

Are you maxed out on contributions to tax-advantaged accounts?

If you have crunched the numbers on your retirement assets with a financial advisor and feel comfortable with your savings, you may be able to devote more income to extra mortgage payments.

However, if you haven’t maxed out your contributions or are concerned about your retirement preparation, you might be better off putting extra money into tax-advantaged saving accounts. The final years before retirement represent your last opportunity to add significantly to your nest egg, and it’s important to make sure you have enough put away.

How would your taxes be affected by paying down the mortgage?

For many people, mortgage interest payments are deductible on federal taxes, which reduces the effective interest rate paid on the loan. Since contributions to retirement accounts, health savings accounts, and other qualified accounts are frequently tax deductible, making extra contributions (instead of extra mortgage payments), may add more to your bottom line.

However, if you are no longer able to deduct the interest on your mortgage, and are already maxed out on your tax-advantaged contributions to retirement accounts, paying down your mortgage could make financial sense. Keep in mind that taxes are just one part of the overall picture, and it’s important to view your financial situation holistically.

Do you have adequate cash reserves?

Emergency savings are a critical part of your long-term financial plan. Unexpected life events like the loss of a job, a sudden illness, or expensive repairs can put a strain on your household finances. Having several months of income saved in cash can help you cover major expenses without being forced to liquidate investments or go into debt. If you don’t already have an emergency reserve – or don’t have enough money set aside – you should consider saving those extra mortgage payments for a rainy day.

Have you weighed risk against potential return?

Paying off high-interest credit card debt or personal loans is a no brainer. The average variable credit card APR was 15.61% at the end of April 2014.2 This means you’re essentially ‘earning’ that much back on every dollar you pay off. You’re not likely to find investments paying that much consistently, so your priority should be to pay off that debt as quickly as possible.

However, given how low mortgage rates are – especially if you’re getting a tax break on the interest – you’ll want to carefully weigh the possibility of earning market returns higher than your interest rate. Market returns are not guaranteed, so it’s a good idea to have a financial representative walk you through these calculations and help you understand your own attitude about risk and return.

How would paying off your mortgage affect your peace of mind?

Most financial decisions have emotional components, which is why it’s so important to develop an understanding of your long-term goals. For many folks, knowing that they own their home free and clear outweighs most financial considerations. If being able to pay off your mortgage early helps you sleep better at night, it might be the best decision for you.

Conclusions

As you can see, there are many important variables that must be factored into a decision about paying off your mortgage. If you have any questions about the benefits and drawbacks of holding a mortgage or any other loan, please give us a call. We frequently help our clients evaluate their personal financial situations and help them determine the right strategy for their needs and goals.

 

Is the Bull Market Over? Weekly Update – June 23, 2014

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Image courtesy of FreeDigitalPhotos.net/ddpavumba

Markets rallied strongly last week and closed at new records for the S&P 500 and Dow. Though stocks ran in circles early in the week, they picked up the pace after Wednesday’s reassuring Federal Open Market Committee (FOMC) meeting announcement. For the week, the S&P 500 gained 1.38%, the Dow grew 1.02%, and the Nasdaq added 1.33%.1

There were no surprises from the Fed’s June Open Market Committee meeting. The FOMC announced another $10 billion cut to quantitative easing, lowering monthly bond purchases to $35 billion, and emphasized its commitment to data-driven decision-making with respect to future interest rate hikes. The Fed also released economic projections for the rest of the year, forecasting an unemployment rate of 6.0%-6.1% at the end of the year. On the down side, the Fed lowered expectations for annual Gross Domestic Product (GDP) growth, projecting that the economy will grow just 2.1%-2.2% this year.2 Investors counted the meeting as a win, reassured that the Fed is still willing to support markets.

Stocks jogged past more milestones last week, producing record highs for the S&P 500 and the Dow on Friday. Such performance naturally leads to the question: Is the bull market ending? By the calendar, you might think so. The average bull market lasts 62 months,3 and we passed that mark earlier this year, but there are several good reasons for why we aren’t looking for the end just yet:4

1)    Economic growth is still moderate. Bull markets often end when the economy gets overheated and investors start worrying about the next recession. GDP growth is still below-trend, and current forecasts show that it probably won’t crack 3.0% until 2015.5 Future economic growth potential may give this bull market a second wind.

2)    There’s still money on the sidelines. Many investors and corporations have piles of cash sitting around uninvested. When these stragglers finally start buying into the trend, the inflow of cash may send markets higher.

3)    Plenty of bull markets last longer than 62 months. The one between 1987 and 2000 lasted roughly 150 months, and the rally between 1949 and 1956 lasted about 87 months.6

Now, we can’t assume that markets will continue their upward progress indefinitely. As we discovered in the first few months of the year, declines do happen. One of the benefits of an active management strategy is that we can use these interruptions in the overall trend to cherry pick solid investments at attractive prices. Overall, we’re still cautiously optimistic about market performance going into the latter half of the year. We’ll know more about future prospects as Q2 economic data and earnings reports trickle in over the coming weeks.

ECONOMIC CALENDAR:

 

Monday: PMI Manufacturing Index Flash, Existing Home Sales

Tuesday: S&P Case-Shiller HPI, New Home Sales, Consumer Confidence

Wednesday: Durable Goods Orders, GDP, EIA Petroleum Status Report

Thursday: Jobless Claims, Personal Income and Outlays

Friday: Consumer Sentiment

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HEADLINES:

U.S. exports slump. America’s current account deficit – the difference between imports and exports – widened in the first quarter largely because the cold weather caused exports to pile up in port. Hopefully, stronger overseas demand will cause exports to pick up in the second quarter.7

Weekly jobless claims fall. The number of Americans filing new claims for unemployment benefits fell more than expected last week, suggesting that labor market conditions continue to improve.8

U.S. manufacturing production rises. Factory production rose significantly in May, supporting the belief that the sector is rebounding strongly after the first quarter slowdown. Since manufacturing contributes 12.5% to GDP growth, we can hope for a strong showing this quarter.9

Oil prices rise on Iraq fears. The price of Brent crude oil rose above $113/barrel as the fighting in Iraq intensified and shut down the country’s biggest refinery. Though exports have not yet been affected, it’s likely that prices will continue to be affected as investors respond to disruption fears.10

 

 

Are Student Loans The Next Bubble?

As graduating students look to build their resume they might want to leave out one accomplishment: most indebted class ever to graduate.  According to National Center for Education Statistics, the average student graduating in 2014 will have $33,000 in student loans.1

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Not only is the average debt rising faster than inflation, the number of students needing to take out loans has risen from less than half in 1994 to just over 70% this year.1 The total debt is closing in on $1 trillion according to Federal Reserve Bank of New York, Bloomberg.2

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According to the Consumer Financial Protection Bureau, CFPB, more than 7 million borrowers of federal or private student loans were more than 270 days late on payments which puts them in the default category.  This means that from the $1 trillion of federal student loans about $90 billion has been defaulted on.3  Could this lead to a crisis similar to the subprime loan crisis of 2008? Although student loan debt is second in ranking on consumer debt it is dwarfed by mortgage debt.2  This chart should help put the two into perspective when it comes to the impact on our economy.

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Also, on average 90% of student loans are Federal student loans which are backed by the government.2   Having such a large amount backed by the federal government would reduce the amount of pressure put on the lending industry.  In 2006 leading up to the subprime crisis, 84% of those loans were from private lending companies.4  This means that the smaller size of the student loans and the minority being held privately would keep the student “bubble” from impacting the overall market in the same way that the subprime loans did.

So if there isn’t a risk of repeating the subprime crisis why all the talk about student loans lately?  One of the biggest concerns is the trend of both the student debt and the earnings the students are getting out of college.1   If this trend continues we could see more students in default as well as a drag on the growth of the Gross Domestic Product.

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There is some relief, Federal loans can sign up for the “Income Based Plan” or the “Pay As You Earn”.  These plans keep the payments below a certain percent of the income of the borrower and forgives any debt after 25 years (10 years for public service employees).5  Allow qualifying and the annual reporting can be a hassle.

You might be asking; “I have young kids that I hope will attend college one day, what can I do?”

  1. Start planning in advance for your children, look into opening a college saving plan that can grow tax free to increase your savings for college.
  2. Encourage your teenagers to consider the cost of college compared to the average salary for the career they plan on pursuing.  Some careers are better achieved by apprenticeship or an internship.
  3. Apply for all scholarships that are available for your children.
  4. Consider the costs of dipping into your retirement account.  It may be better for your kids to take out some student loans if it will keep you from putting your retirement in jeopardy.

Always seek advice from your financial advisor when making these decisions.

 

 

Resources

  1. http://blogs.wsj.com/numbersguy/congatulations-to-class-of-2014-the-most-indebted-ever-1368/
  2. http://us.milliman.com/insight/insurance/The-student-loan-debt-crisis-in-perspective/#2
  3. http://www.usnews.com/news/articles/2013/08/06/half-of-outstanding-student-loan-debt-isnt-being-repaid
  4. http://www.forbes.com/sites/stevedenning/2011/11/22/5086/
  5. https://studentaid.ed.gov/repay-loans/understand/plans/pay-as-you-earn