At this time of year regulations require that hard copies of specific data relating to our firm and your privacy be provided to all clients. Our Ethics statement, Privacy practices, and any material changes to our business model are enclosed in this mailing.
We also take this opportunity to pen a hard copy of our monthly Lesjak Planning Perspective which focuses on current market trends.
The S & P 500 Index has a gain of 2% this year to date and a 14% gain over the past twelve months. Its smaller company cousins have experienced quite a different experience year to date with average losses over 5%. As written in last month’s Perspective, many big names in the technology or small company indexes are down 30-40% for the past couple of months.
These types of shifts in volatility renew old fears of the prior market declines that we experienced over the past decade and a half. Just a week ago statistics showed an outflow from U.S. stock funds of over $2.3 billion. This money primarily moved over to bonds and international stocks. Investors in money market funds redeemed over $9 billion in search of more return. Again, much of that influx is going to bonds. The balance of $2.6 trillion in money market funds is still at historically high levels and will eventually find a home in bonds or stocks. But which one is the correct investment at this time?
In the case for bonds, the Federal Reserve at their recent meeting re-affirmed their intent to continue reducing their bond buying program by $10 billion each month. With no real inflation rearing its head, and with the economy still just barely moving forward, the Fed feels it needs to continue keeping interest rates low. Many market analysts are betting rates will not rise until the summer of 2015. In this scenario, bond owners should beat the low rates offered by savings and CD’s during the period. If the economy begins to grow faster and signs of inflation appear, the Fed could be forced to raise rates sooner than planned. This would be negative for bonds.
Regarding stocks, a definite shift has occurred out of recently robust technology and small company stocks. The question is – is this a normal shift out of sectors that have become too expensive, or is it a sign of a larger, more broad based correction? Just a week ago as the smaller names were experiencing double digit declines, the larger company S & P 500 Index made a new all-time high. This shows the substantial variance between the riskier small company stocks and the more stable large company stocks. Obviously, a perceived flight to quality has occurred.
Advancing issues compared to declining issues are still very positive as are the percentage of companies beating their earnings estimates this quarter (56%) and those beating revenue projections (56%). Technical analysts that chart this type of market action feel that it rarely leads to a long term correction. Although most market indexes have been range bound for a few months, the consensus among analysts we follow is that while many things can occur to produce a negative short term reaction, we are in a long term secular bull market that can run for years yet. Even if stock prices are staying within a specific range for a time being, many still pay dividends that are reinvested adding more shares to our holdings. Sitting tight during periods such as these usually proves to be an excellent long term decision.