Schwartz Financial Weekly Commentary 7/3/17

The Markets

This is the way the quarter ends – with a central bank scare.

Central bankers are stodgy. They speak carefully. For many, reading the words ‘Federal Reserve’ is enough to cause boredom to set in and web surfing to ensue.

Last week, though, the European Central Bank and Bank of England cracked the ‘open secret’ (i.e., central banks will provide less stimulus and increase rates at some point), and investors did not like what they heard.

Central bankers were quick to say they didn’t necessarily mean what people had heard, but the rumor of less accommodative monetary policy was already moving markets. Barron’s wrote:

“But make no mistake: Last week was a game changer. Federal Reserve Chair Janet Yellen fretted about the high level of asset prices, the Bank of England’s Mark Carney hinted at a rate hike, and Mario Draghi suggested the European Central Bank could be nearing the end of its bond buying…The market didn’t take it sitting down. Long-term Treasury yields surged, resulting in a wider spread off of short-term bond yields.”

A wider spread between short- and long-term Treasuries could be good news. The Federal Reserve Bank of Cleveland explained:

“The slope of the yield curve – the difference between the yields on short- and long-term maturity bonds – has achieved some notoriety as a simple forecaster of economic growth. The rule of thumb is that an inverted yield curve (short rates above long rates) indicates a recession in about a year, and yield curve inversions have preceded each of the last seven recessions…”

Central bankers comments affected U.S. stock markets, too. The technology sector lost its allure, while the possibility of rising interest rates made the financials sector more attractive. It didn’t hurt that all major institutions passed the Fed’s stress tests for the first time. That could translate into share buybacks and higher dividends, reported Financial Times.

There were some notable statistics during the second quarter of 2017. For instance:

Investors were preternaturally calm  

Throughout second quarter, investors have been confident the Standard & Poor’s 500 Index would offer a smooth ride. The CBOE Volatility Index (VIX), a.k.a. the fear gauge, has only closed below 10 sixteen times; seven occurred during the second quarter of 2017.

Consumer sentiment was quite positive

Consumers were feeling highly optimistic throughout the quarter. In June, the University of Michigan Consumer Sentiment Survey reported, “Although consumer confidence slipped to its lowest level since Trump was elected, the overall level still remains quite favorable. The average level of the Sentiment Index during the first half of 2017 was 96.8, the best half-year average since the second half of 2000…”

Investor sentiment shifted into neutral

Last week, the number of investors who were neutral (rather than bullish or bearish) about markets hit its highest level in a year. The AAII Blog reported:

“This year’s record highs for the S&P 500 and the NASDAQ have encouraged some individual investors, but the Trump administration’s ability (or lack thereof) to move forward on economic and tax policy remains on the forefront of many others’ minds. Also playing a role in influencing sentiment are earnings, valuations, concerns about the possibility of a pullback in stock prices, and interest rates/monetary policy.”

The U.S. economy appears to be growing, albeit slowly. Last week, the Federal Reserve Bank of Atlanta forecast real GDP (Gross Domestic Product) growth during the second quarter of 2017 at 2.7 percent.

Data as of 6/30/17 1-Week Y-T-D 1-Year 3-Year 5-Year 10-Year
Standard & Poor’s 500 (Domestic Stocks) -0.6% 8.2% 15.5% 7.3% 12.2% 4.8%
Dow Jones Global ex-U.S. -0.2 12.6 17.4 -1.1 5.1 -1.2
10-year Treasury Note (Yield Only) 2.3 NA 1.5 2.5 1.6 5.0
Gold (per ounce) -1.1 7.2 -5.9 -1.9 -4.8 6.6
Bloomberg Commodity Index 3.7 -5.6 -7.0 -15.0 -9.5 -7.0
DJ Equity All REIT Total Return Index -1.0 4.9 0.2 9.0 9.7 5.9
S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

You say potato, i say potato. A persistent debate among the geek set is how to pronounce the abbreviation for Graphics Interchange Format (GIF). You know, GIFs, the animated images you see online. Graphics starts with a hard ‘g’ sound, but pronunciation conventions suggest that ‘g’ makes a soft sound before the vowel ‘i.’ The Economist wrote:

“Some questions will be pondered for all eternity. What is the meaning of life? Where do you go when you die? And, even more puzzlingly, what is the right way to pronounce “GIF?”…Debates over whether it begins with a hard “g,” as in “gift,” or a soft one, as in “giraffe,” can make discussions about religion or politics look civil by comparison. Well aware of the risk that taking a side could lead to protests, boycotts, or worse, the Oxford English Dictionary and Merriam-Webster have maintained strict neutrality. They proclaim that both pronunciations are acceptable, betraying nary a hint of favoritism.”

It’s interesting that dictionaries, those arbiters of correct spelling and pronunciation, would stake out neutral ground. After all, in the early days of the United States correct spelling was open to interpretation. In the American Constitution, the word ‘choose’ is spelled ‘chuse’ and ‘Pennsylvania’ was spelled ‘Pensylvania’ (the Liberty Bell inscription has one ‘n,’ as well). Also, ‘defense’ was spelled ‘defence.’

The first American dictionary wasn’t published until 1806. Its author, Noah Webster, decided many spelling conventions were artificial, so he imposed the standards he preferred, changing ‘musick’ to ‘music,’ ‘centre’ to ‘center,’ and ‘women to wimmen.’ Not all of his changes were accepted.

This year, in an effort to resolve the GIF issue once and for all, a forum for computer programmers surveyed 50,000 users in 200 countries. Sixty-five percent believed a hard ‘g’ pronunciation was correct, while 26 percent believed the soft ‘g’ was right.

The survey results inflamed soft ‘g’ users, who claim it was rigged.

Weekly Focus – Think About It

“My seven-year-old grandson sleeps just down the hall from me, and he wakes up a lot of mornings and he says, ‘You know, this could be the best day ever.’ And other times, in the middle of the night, he calls out in a tremulous voice, ‘Nana, will you ever get sick and die?’ I think this pretty much says it for me and most of the people I know, that we’re a mixed grill of happy anticipation and dread.”

–Anne Lamott, American novelist and non-fiction writer

Value vs. Growth Investing (6/30/17)

Name 1-Week YTD 4-Week 13-Week 1-Year 3-Year 5-Year
US Market -0.53 9.16 0.81 3.07 18.35 9.20 14.57
US Core -0.47 10.18 0.74 3.17 20.32 10.30 15.69
US Growth -1.51 14.95 -0.06 5.86 19.76 9.77 14.55
US Large Cap -0.69 9.89 0.63 3.42 18.42 9.73 14.49
US Large Core -0.67 11.59 0.74 3.84 21.92 11.29 16.12
US Large Growth -1.70 15.78 -0.62 6.07 20.18 10.60 14.96
US Large Val 0.44 2.98 1.87 0.46 13.43 7.32 12.50
US Mid Cap -0.19 8.14 0.84 2.32 17.43 8.10 15.16
US Mid Core -0.11 8.03 0.16 1.63 15.27 8.13 14.90
US Mid Growth -0.89 13.13 1.11 5.23 17.68 7.53 13.44
US Mid Val 0.50 3.46 1.29 0.19 19.52 8.58 17.20
US Small Cap 0.14 4.88 2.72 1.68 20.34 6.77 13.70
US Small Core 0.43 3.77 2.51 1.42 20.59 7.04 14.15
US Small Growth -1.21 11.64 2.82 5.55 21.28 7.15 13.30
US Small Val 1.28 -0.52 2.76 -1.95 18.74 6.02 13.56
US Value 0.51 2.83 1.81 0.24 15.04 7.50 13.53
 ©2004 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) is not warranted to be accurate, complete or timely. Morningstar is not responsible for any damages or losses arising from any use of this information and has not granted its consent to be considered or deemed an “expert” under the Securities Act of 1933. Past performance is no guarantee of future results.  Indices are unmanaged and while these indices can be invested in directly, this is neither a recommendation nor an offer to purchase.  This can only be done by prospectus and should be on the recommendation of a licensed professional.

 Office Happenings:

Independence Day for Early Americans

On July 3rd, 1776, John Adams sent a now-famous letter to his wife Abigail, describing what he thought the future of Independence Day would look like:

I am apt to believe that it will be celebrated, by succeeding generations, as the great anniversary festival. It ought to be solemnized with pomp and parade, with shows, games, sports, guns, bells, bonfires, and illuminations from one end of this continent to the other from this time forward forever more.

As we know, Adams’ prophecy came true. Independence Day is indeed celebrated with “pomp and parade.” From the fantastic firework displays to the patriotic music, the 4th of July has become a grand celebration like no other.

I think one of the things I like most about Independence Day is that it makes me feel a connection with those first Americans who lived and died so long ago. It’s comforting to know that the feelings of patriotism and pride I feel are exactly what they felt.

Here’s an example of one of the earliest Independence Day celebrations that took place in Philadelphia back in 1777:

Yesterday the 4th of July, being the Anniversary of the Independence of the United States of America, was celebrated in this city with demonstration of joy and festivity. About noon all the armed ships and gallies in the river were drawn up before the city, dressed in the gayest manner, with the colors of the United States and streamers displayed. At one o’clock, the yards being properly manned, they began the celebration of the day by a discharge of thirteen cannon from each of the ships, and one from each of the thirteen gallies, in honor of the Thirteen United States. The band of music attended and heightened the festivity with some fine performances suited to the joyous occasion.

After dinner, a number of toasts were drank, all breaking independence, and a generous love of liberty, and commemorating the memories of those brave and worthy patriots who gallantly exposed their lives, and fell gloriously in defense of freedom and the righteous cause of their country. Each toast was followed by a discharge of artillery and small arms, and a suitable piece of music by the band. The glorious fourth of July was reiterated three times accompanied with triple discharges of cannon and small arms, and loud huzzas that resounded from street to street through the city.

The evening was closed with the ringing of bells, and at night there was a grand exhibition of fireworks, which began and concluded with thirteen rockets on the commons, and the city was beautifully illuminated. Everything was conducted with the greatest order and decorum, and the face of joy and gladness was universal. Thus may the 4th of July, that glorious and ever memorable day, be celebrated through America, by the sons of freedom, from age to age till time shall be no more.

So many generations have passed since that particular celebration. We all wear different clothes, play different games, and eat different food. More than anything, the flag looks much different now, having gone from thirteen stars to fifty.

But the emotions we feel are still the same. Our love of liberty hasn’t changed. We still commemorate the memories of “those brave and worthy who gallantly exposed their lives.” And every 4th of July is still marked by the same expressions of joy and gladness.

Many years have passed since those early Americans. But for one day every year, the great span of time that separates us shrinks to the width of a thread. We are Americans, just as they were. All the differences between our lives and theirs vanish in importance.

For one day, at least, we are the same.

From all of us here at Schwartz Financial, I wish you and your family a safe and happy Independence Day! May it be a day of joy and gladness.

Regards,

Michael L. Schwartz, RFC®, CWS®, CFS

 P.S.  Please feel free to forward this commentary to family, friends, or colleagues.  If you would like us to add them to the list, please reply to this email with their email address and we will ask for their permission to be added.

Michael L. Schwartz, RFC, CWS, CFS, a registered principal offering securities and advisory services through Independent Financial Group, LLC., a registered broker-dealer and investment advisor.  Member FINRA-SIPC. Schwartz Financial and Independent Financial Group are unaffiliated entities.

This information is provided for informational purposes only and is not a solicitation or recommendation that any particular investor should purchase or sell any security. The information contained herein is obtained from sources believed to be reliable but its accuracy or completeness is not guaranteed.  Any opinions expressed herein are subject to change without notice.  An Index is a composite of securities that provides a performance benchmark.  Returns are presented for illustrative purposes only and are not intended to project the performance of any specific investment.  Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly.  Past performance is not a guarantee of future results.

 * The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

 

* The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices. 

 

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

 

* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.

 

* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

 

* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

 

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

 

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

 

* Past performance does not guarantee future results.

 

* You cannot invest directly in an index.

 

* Consult your financial professional before making any investment decision.

 

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