Bernanke, Nerds, Bonds and Your Weekly Market Update

OK, we admit that putting the Chairman of the Federal Reserve in a sentence with the word “Nerd” is unusual. But he did it himself, as you’ll see (among other things!) in your Update this week.

We continue to see reactions in both the stock and bond markets to the Chairman’s remarks, and, more importantly, to the assumed future actions of the Federal Reserve. Regardless however, since most portfolios hold a respectable percentage of assets in bonds in particular, strategy is important.

We outline ours a bit in this week’s missive which we hope you’ll enjoy. As well, check your mailbox (the real one) next month… we’ll have a great deal to say then.

All the best,
Lee and Jeremy

PS—You’ll want to pass this on to friends and family members who may be using bonds to provide income for themselves, especially. L&J


This Week’s Quote:

“In fact, the world needs more nerds.”
~ Ben Bernanke


JL Davis Thoughts This Week:

Doubtless, you’ve been hearing about “the bond market”. From us at JL Davis and from the media, be it TV, newspapers or magazines. Very soon, when most of us take a peek at our investment statements, we’ll better understand what the fuss is all about. But making sense of the situation is altogether different. That’s why we’ve been communicating clearly on the issue for some time now, and why we’ll soon be sending our great clients a definitive piece on “Bonds, James and Others”. Be on the lookout.

For now it’s important to know that for the last several years the Federal Reserve has been buying bonds at an amazing level, up to some $85 billion a month. They’ve done so for a simple reason: it has been part of their arsenal to keep the U.S. economy growing. The good news is this seems to have worked since the economy is growing at a rate of 2-3% annually. The Fed has also acted to keep interest rates low, thus allowing folks to borrow (and spend!) more, further boosting the economy as a whole.

A by-product of these actions has been more than kind to bond investors, which most of us are, at least in part. Lower interest rates have meant higher bond prices. Until now.

With Chairman Ben Bernanke’s recent pronouncements that the Fed will be considering “tapering” the bond purchases by the middle of 2014 (provided unemployment falls to 7% or less) we’ve seen some drama in the markets. Both the Dow® and S&P 500® quickly declined about 1.4% after the initial statement. Bond prices also dropped. Reacting to short term changes is unwise in our view, so it’s no surprise to us that stocks started to rise again shortly afterward. It’s also no surprise from our perspective that though they’ve recovered a bit of late, bond prices will go down. We’ve said those used to double-digit bond investment returns will likely see them come to an abrupt end.

That’s why we’ve suggested (and acted proactively since last March where we could) that clients consider moving out of long-term bonds, shortening their durations and decreasing volatility.

While we’re not going to react to headlines, we do intend to see to it that our client’s portfolios continue to be built around the fundamentals of good investing that have proven effective regardless of the “weather”. We believe that a properly allocated portfolio removes the need to react based on the day-to-day changes of the markets.

Stay tuned. We’ll be closely in touch, as always.**


http://www.marketwatch.com/story/fed-seen-making-first-taper-move-in-september-2013-08-24
http://www.forbes.com/sites/robertlenzner/2013/08/24/theres-a-powerful-lot-of-confusion-over-the-feds-urge-to-taper/


Market Week: August 26, 2013

The Markets

Equities didn't seem to suffer any ill effects after a technical glitch brought trading of Nasdaq-listed securities to a standstill for more than three hours on Thursday. In fact, the Nasdaq actually posted the week's strongest gains. The S&P 500 and small-cap Russell 2000 also were positive, but the Dow had its third straight negative week, though it edged back above the 15,000 mark. The 10-year Treasury yield continued to rise until Friday, when a weak housing report helped reverse the week's increases.

Last Week's Headlines

• Members of the Federal Open Market Committee seem as unsure as everyone else about precisely how soon quantitative easing will begin to wind down. Minutes of the FOMC's July meeting showed that some members favor starting to cut bond purchases "in the near future" (meaning as early as September) while others advocate a delay until later in the year. However, they generally expressed support for the overall tentative timetable laid out in June, which suggested purchases might end entirely by mid-2014.
• Existing home sales were up 6.5% in July. The National Association of Realtors® said an increase in mortgage rates helped motivate buyers to try to close before rates rose further. That pushed resales to their highest level since buyers were racing to qualify for the homebuyer tax credit deadline in late 2009.
• Sales of new homes didn't fare as well. The Commerce Department said they fell 13.4% in July to the lowest level since October, though they were still 6.8% higher than last July and followed several months of strong gains.
• The Nasdaq literally flatlined for more than three hours on Thursday after trading in Nasdaq-listed securities came to an abrupt halt because of what was described as a technical problem with connectivity at the exchange. At week's end, no specific cause for the outage had been publicly identified, though Nasdaq OMX Group said there was no evidence that hacking was involved.
• Longtime Microsoft CEO Steve Ballmer said he will retire within the next year once the board of directors names a successor.


Eye on the Week Ahead

Any traders still at their desks instead of on vacation are likely to view economic data, including revisions to the Q2 GDP estimate, through the prism of its potential impact on the FOMC's September meeting.


Key dates and data releases: durable goods orders (8/26); home prices (8/27); 2nd estimate of Q2 GDP (8/29); personal income/spending (8/30).

All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

Prepared by Lee Davis** and Broadridge Investor Communication Solutions, Inc. Copyright 2013