Stock Market Gains Continue as Interest Rates Stay at Historic Lows
Sources: Equity Market, Fixed Income and REIT returns from JP Morgan as of 07/15/16. Rates and Economic Calendar Data from Bloomberg as of 07/18/16.
Stocks in the U.S. posted another week of strong gains and international developed markets joined in on the fun as Brexit fears continue to subside and strong global economic reports point to relatively stable economies throughout much of the world. While the S&P 500 Index rose 1.5%, international markets posted the strongest gains with the MSCI EAFE Index, a measure of international developed market performance, gaining 3.7% and the MSCI Emerging Market Index increasing by 4.9%. International developed markets are now closer to breakeven levels for 2016, down only 1.5% for the year.
Holders of U.S. stock have been one of the primary benefactors of interest rates that remain near record lows. Consider that the S&P 500 Index is now up over 7% this year on a total return basis and has a forward Price-to- Earnings ratio of 17.1. As we wrote last week, the 10 year average of this ratio is 14.3, suggesting that investors are currently willing to pay more for the return potential offered in stocks. One potential reason for the acceptance of high valuations is the low yield fixed income securities are providing. We believe that these low yields, in addition to uncertainty with international markets and economies looking ahead, may support additional demand for high quality, dividend paying U.S. stocks and should comfort investors who think the market may be too expensive and facing a potential a pullback.
While we believe the U.S. economy is on a relatively stable footing at present, and likely to continue to grow over the short to intermediate term, we caution anyone from jumping into the U.S. stock market in an attempt to chase recent returns. A well-diversified portfolio of U.S. and international stocks, bonds and alternative investments, such as Real Estate Investment Trusts (REITs), should continue to help investors achieve their longer term investment objectives. To help ensure that your portfolio has an appropriate blend of asset classes in accordance with your goals, timeframes and tolerance for risk, we suggest that you have a portfolio review done on at least an annual basis. To have our professional portfolio management team conduct this review for you on a complimentary basis, please do not hesitate to speak with your Hennion & Walsh Financial Advisor or a member of the Hennion & Walsh Asset Management Team.
Important Information and Disclaimers
Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion & Walsh cannot guarantee the accuracy of said information and cannot be held liable. This information is provided for informational purposes only and is not a solicitation to buy or sell any of the asset classes or sectors discussed.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.
There are special risks associated with an investment in real estate, including credit risk, interest rate fluctuations and the impact of varied economic conditions. Distributions from REIT investments are taxed at the owner’s tax bracket.
The prices of small company and mid cap stocks are generally more volatile than large company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions.
Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.
Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.
Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Bond Prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.
MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.
MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.
Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.
ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.
ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.
Investors cannot directly purchase any index.
LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.
The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.
The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITSs that primarily own and operate income-producing real estate.