We are just past the halfway point of 2014, so I thought it would be interesting to take a look at what the markets have done so far this year.

As of this writing (7/23/2014), the S&P 500 is up 8.51% since the beginning of the year. The S&P 500 is an index made up of the 500 largest U.S. stocks and is widely used as a proxy for the overall stock market. It encompasses about 75% of the value of all U.S. stocks.

In the world of bonds, the ten year Treasury yield has dropped from 3.03% on January 1st to a 2.47% today. As measured by the Barclays U.S. Aggregate Bond Index, bonds have gained 4.06% year to date (lower yields = higher prices). This is a broad based index that includes U.S. Government bonds, agencies, investment grade corporates, and mortgage backed securities. And this is where it gets interesting.

Last year, the bond market lost about 2% due largely to the fact that the Fed hinted to, and then did indeed, reducing their monthly bond purchases (exiting a program known as Quantitative Easing 3). With the Government buying fewer bonds, the demand dropped, as did the prices. This (eventually) helped the stock market as the Fed seemed to be signaling that the Economy was getting healthier and no longer needed as much cash infused into it. The S&P 500 gained 30% last year.

As we began this year, the markets seemed to be pointing towards a slowdown in the Economy. The stock market fell nearly 6% in January while the 10 year Treasury yield started to drop. Then things got weird. Since the low on February 3rd, the S&P 500 has gained nearly 14%. Meanwhile, the 10 year Treasury yield continued to fall to 2.47%, even as the Fed further reduced their bond purchases. In short, the stock market was signaling growth, while the bond market was signaling weakness.

Why this divergence? There are several ideas out there. First, there’s rebalancing. This is the idea that because stocks did so well over the last two calendar years (up 46% since the beginning of 2012), that large pension funds and money managers needed to sell stocks and buy bonds to rebalance. Another theory is that money is flowing into U.S. Treasuries from European bond holders. While we did lose our triple A rating a few years ago, we are still viewed as one of the best credits in the world. So, when you are getting 2.56% on a Spanish 10 year, or 2.77% from Italy, 2.47% on a U.S. Treasury doesn’t seem so bad. Geopolitics most certainly plays some part in this. As Russia continues to stir the conflict in Ukraine, sectarian violence erupts in Iraq, and military action between Israel and Hamas flares up, investors may be seeking out safety.

Meanwhile, investors still seem to believe that the Economy is poised to grow. Even with a negative growth rate for first quarter GDP (-2.9%) and a soft housing market, the S&P 500 is near all time highs. Money also may be flowing into high dividend paying stocks as investors look for alternatives to fixed income securities.

I believe that the stock market should continue to grow. Slowly, however, as the Economy is growing slowly. I don’t think that the market is overvalued even as we come off a 30% gain last year. If you look at ten year rolling periods, the historical return is about 10% annually. However, over the last ten years, the S&P 500 has gained just 8.34%. The conundrum of the growing stock market and the dropping interest rates is probably a combination of many influences (some mentioned above). I also believe that rates may have moved up too much last year and are settling back to a more appropriate level. Over the past six years, the Fed has taken several historic and untested steps to encourage growth in the economy. And even they didn’t know what to expect in the aftermath.

*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. Verity Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.

Gavin Chinn, CFS* Financial Advisor

Check the background of this investment professional on FINRA’s BrokerCheck.

An Investment Advisor registered through CUSO Financial Services, L.P., Gavin has 22 years of experience as an advisor in the Puget Sound area.

“I believe every client is unique and deserving of a personalized financial plan that will help them reach their individual financial goals. Before I make any recommendations, I like to get to know my clients. By asking the right questions, and developing an honest, trusting relationship I can really get a sense of what’s going to work best for them.”

Gavin graduated from the University of Washington with a BA in Business Administration and started his financial career with US Bank in the Investment Department. Prior to joining Verity in 2006, he spent eight years with Piper Jaffray.

So what is Gavin’s vision for his dream retirement?

“My dream retirement would be absolutely worry free: financially, emotionally, and in every aspect of life. My finances would be in order so expenses for travel, luxuries, and gifts for the kids, grandkids, and great-grandkids would be taken care of. My kids would be financially sound, so I would be confident in their prosperity. This would give me the freedom to travel and play and do whatever it is I want to do.”

When Gavin’s not working, he enjoys spending time with friends and family, watching Husky football, and taking weekend trips around the Northwest.

Gavin is registered to transact securities business in the states of WA, OR, CA, AZ, FL, HI, ID, IL, MN, NM, NY and VA.

*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. Verity Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.

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