General market news

  • The European debt crisis, combined with somewhat disappointing economic numbers that point to a slowdown in the second half of the year, contributed to a Treasury rally. The 10-year was as low as 3.04 percent early Friday morning, its lowest point since December 7, 2010.
  • For the most part, domestic equity markets were flat to modestly negative last week; the S&P 500 declined just 10 basis points (0.10 percent).
  • Late Friday, the 2-year Treasury stood at 0.492 percent and the 30-year was at 4.21 percent. The trend for the 30-year is something to keep an eye on, as the long bond has been least affected by the Federal Reserve’s purchasing program; it has been on a downward trend since reaching 4.76 percent on February 10.
  • After 27 weeks of outflows from municipal funds, investors started allocating more money to the space last week. Positive performance in April and May likely contributed to new investment.
  • Lackluster regional manufacturing surveys and a weaker-than-expected durable goods report are raising concerns about the sustainability of the manufacturing recovery.
  • The Merrill Lynch U.S. Corporate Master Index returned 0.09 percent last week, translating into a year-to-date return of 2.69 percent.
  • The JP Morgan Global High Yield Index lost 0.12 percent for the week, driven by poor equity performance and increased volatility; year-to-date, the high-yield market has returned 6.13 percent. Market yields remain near record lows, but spreads (a measure of credit risk) are near long-term historical averages.
  • Sentiment in equities has soured recently after disappointing economic news and concerns over Greek sovereign debt, creating a sense of déjà vu from last May. Valuations remain very reasonable at current levels, however.

 

Equity Index

Week-to-Date %

Month-to-Date %

Year-to-Date %

12-Month %

S&P 500

–0.11%

–2.17%

6.69%

23.09%

Nasdaq Composite

–0.21%

–2.54%

5.82%

24.07%

DJIA

–0.49%

–2.53%

8.67%

24.50%

MSCI EAFE

–0.89%

–5.51%

3.69%

28.17%

MSCI Emerging Markets

–0.58%

–5.53%

–0.68%

28.11%

Russell 2000

0.89%

–3.27%

7.17%

26.21%

 

Fixed Income Index

Month-to-Date %

Year-to-Date %

12-Month %

U.S. Aggregate

1.23%

2.94%

5.54%

U.S. Treasury

1.44%

2.45%

4.13%

U.S. Mortgage-Backed Securities

1.05%

2.75%

4.69%

Municipal Bond

1.65%

3.99%

2.96%

U.S. Treasury: U.S. TIPS

0.44%

5.10%

8.55%

 

What to look forward to

The S&P/Case-Shiller 20-city home price composite declined 0.20 percent in March, in line with economists’ forecasts. House prices have continued to fall since temporarily increasing a year ago in response to the first-time homebuyer tax credit. The evidence suggests that the program only pulled demand forward and had no positive, long-term effect on the housing market. On the plus side, house prices haven’t been falling as quickly as they did in the latter half of 2010.

 

Given the weak manufacturing data we’ve seen out of the New York, Richmond, and Philadelphia, investors and analysts were keeping a close eye on the Dallas Fed Manufacturing Activity index Tuesday morning. The index defied expectations, rising from 8 to 13. The nationwide ISM Manufacturing index is also expected to slip—to 57.5 from 60.4—which would be less expansionary than before but still positive.

 

After a decrease in Initial Jobless Claims failed to materialize last week, analysts believe claims will fall only slightly to 420,000 this week. Consensus is also less optimistic about Nonfarm Payrolls, which are expected to have increased only 190,000 in May, after jumping 244,000 in April. While government layoffs have hurt payrolls in recent reports, this time economists expect private industry to have a lower ratio of hiring to firing. The Unemployment Rate, on the other hand, is anticipated to fall to 8.90 percent from 9 percent. Unemployment is typically a less reliable indicator than payrolls, however, as it is based on a smaller and more variable sample size.

 

Disclosures: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poor’s. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The Dow Jones Industrial Average is computed by summing the prices of the stocks of 30 large companies and then dividing that total by an adjusted value, one which has been adjusted over the years to account for the effects of stock splits on the prices of the 30 companies. Dividends are reinvested to reflect the actual performance of the underlying securities. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index. The Barclays Capital Aggregate Bond Index is an unmanaged market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities with maturities of at least one year. The U.S. Treasury Index is based on the auctions of U.S. Treasury bills, or on the U.S. Treasury’s daily yield curve. The Barclays Capital Mortgage-Backed Securities (MBS) Index is an unmanaged market value-weighted index of 15- and 30-year fixed-rate securities backed by mortgage pools of the Government National Mortgage Association (GNMA), Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (FHLMC), and balloon mortgages with fixed-rate coupons. The Barclays Capital Municipal Bond Index includes investment-grade, tax-exempt, and fixed-rate bonds with long-term maturities (greater than 2 years) selected from issues larger than $50 million. The Barclays Capital U.S. Treasury Inflation Protected Securities (TIPS) Index measures the performance of intermediate (1- to 10-year) U.S. TIPS. The Merrill Lynch U.S. Corporate Master Index tracks the performance of U.S. dollar-denominated investment-grade corporate debt issued in the U.S. domestic market. The JP Morgan Global High Yield Index is an unmanaged index used to mirror the investable universe of the U.S. dollar global high yield corporate debt market of both developed and emerging markets.

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Joe Smalley is a financial advisor practicing at 2900 West Road, Suite 222, East Lansing, Michigan 48823. He offers securities and advisory services as an investment adviser representative of Commonwealth Financial Network®, a member firm of FINRA/SIPC, a Registered Investment Adviser.

 

Authored by the Investment Research team at Commonwealth Financial Network.

 

© 2011 Commonwealth Financial Network®