June is busting out all over WallStreet. The DOW stocks kept hitting new highs in May following a virtually unabated rally since November.
As we entered June, investments were poised for a breather. An initial sell-off was driven by a jump in interest rates. They jumped and traders slammed on the brakes. Selling ensued because traders feared the cost of money would continue to spiral higher. Hence, the DOW slid 5% to kick off the happiest month of the year.
Selling contagion was fiercer overseas where Japanese stocks lost 20%. Bear in mind, Japan was up 50% so far in 2013 thanks to its aggressive monetary policy to kick start its 2-decade economic slump. It’s working but not clear if it’s sustainable. However, anytime assets rise 50% in a short time, giving back 20% isn’t bad.
The US continues to be the safest and most stable market around the globe. Demand for US assets is potent. Even though interest rates have risen, in actuality they are still historically low. YIELD on the 10-Year Treasury Bond popped from 1.6% yield to the current 2.1%. That’s a 30% move. Also, interest rates on conforming 30-Year fixed mortgages leapt over 4% again, for the first time in over a year. For those that remember 11% double-digit mortgage rates in the early 1980’s, you know money is still downright cheap!
Stocks are still the preferential investment class. Higher interest rates have driven some income investment prices lower. This is a normal market adjustment. The fact is we don’t see significant increases in interest rates for the rest of 2013 but admittedly they are beginning to trend higher. They should: It’s natural and healthy. We continue to modify our income portfolios by introducing income-generating securities that have predictable cash flows with opportunity for price appreciation that the bond market might not provide for the coming years. As mentioned in our Spring newsletter, a big focus for us is to buy rock solid dividend stocks while awaiting the chance to morph back into coupon bonds when rates are higher. This plan is working beautifully.
The US economy continues to prove its resiliency. The May job report was better than expected. That put another charge into the stock market to end a raucous week on a high note. We expect to see a pretty eventful summer. The volatility should increase. So buckle up. Have a great weekend. We’re on it.
By: Mike Frazier