The S&P 500 index and the Dow Jones industrial average stood close to record highs when trading ended Friday. The S&P eked out a small gain of 0.2% over the week and is up 4.1% year to date.
Bonds sold off a bit with yields on the 10 year Treasury rising to 2.21% from 2.14% a week ago.
The FOMC minutes covering the April meeting were released on Wednesday and confirmed that September is the most likely date for a hike in the fed funds rate, which has been close to zero since December 2008. Mixed data on the economy of late and subdued inflation argue for patience by the Federal Reserve.
Last week Chicago was downgraded to junk. This week Puerto Rico is in the headlines – again. The U.S. territory’s economy has contracted for 27 months in a row and the unemployment rate is 11.8%. The local government faces a $191 million budget gap and must make a $630 million debt service payment on July 1. It has issued more debt than all but two states. The G.O. debt is junk rated CCC+/B. Bonds issued last year and maturing in 2035 trade at 80 cents on the dollar today. They have a taxable-equivalent yield of 17%, compared to 8.6% for Greek 20 year debt. The government hopes to raise the sales tax and sell yet more bonds. APCM does not own the credit.
The U.S. Underestimates Growth op ed by Martin Feldstein in WSJ Tuesday. Here are a few gems:
Official statistics also portray a 10% decline in the real median household income since 2000, fueling economic pessimism. But these low growth estimates fail to reflect the remarkable innovations in everything from health care to Internet services to video entertainment that have made life better during these years, as well as the more modest year-to-year improvements in the quality of products and services.
Americans are enjoying faster real income growth than the official statistics indicate, but we can achieve even faster growth with more capital accumulation, increased labor-force participation, and greater innovation that leads to new products and more efficient means of production. Better tax policies can help achieve all three.
Economic data has been soft of late so it was good news to see the rebound in housing starts in April – up 20% month-over-month and at the highest level since November 2007. ISI Research believes that the recent surge in household formation increases the odds that housing starts will gain.
The FT reports: HSBC has become one of the biggest global banks to say it will begin charging clients on deposits. The decision underlies the extraordinary measures banks are taking to prevent their profit margins being crushed in the record low-interest rate environment.
WSJ: Consumer prices in the U.K. fell in April compared with a year earlier for the first time in more than half a century, underscoring the weakness of inflation throughout much of the developed world.
Moody’s on the Greek banking system: Extreme deterioration of Greece’s banking sector makes freezing of bank deposits and implementation of capital controls a high likelihood. The outlook for the Greek banking system is negative, primarily reflecting the acute deterioration in Greek banks’ funding and liquidity. These pressures are unlikely to ease over the next 12-18 months.
Japan’s real GDP grew 2.4% in annualized terms in the first three months of 2015, an improvement from a 1.1% expansion in the previous quarter. Japan’s Nikkei 225 stock index hit a 15-year high following the news.
The markets are closed Monday, and so is APCM. Have a wonderful Memorial Day. Take some time to remember the people who served our great country.
Jeff Pantages, CFA®
Chief Investment Officer