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Jittery Markets as Bonds Sell Off

PantagesGlobal markets are in a jittery mood as rising interest rates have spooked bond and equity investors of late. Janet Yellen didn’t help matters this week by saying “I would highlight that equity-market valuations at this point generally are quite high.”

Still, by Friday market friendly elections in the UK and decent employment data in the US carried the day pushing stocks up late in the week. The S&P 500 ended the week at 2,116, up 0.4%. It’s up 3.5% year to date.

US earnings for Q1 have been on the soft side and while companies are “beating expectations” EPS is up only up 2% year over year.

Despite concern over Greece’s capacity to make looming debt repayments the Euro Stoxx index gained 1% last week. It’s up 7.5% year to date in dollars. The Shanghai index lost some steam declining over 5.2% for the week, but it’s up 30% year to date.

Ten year US Treasury yields jumped 5 bp to 2.15%. They are up 30 bp since mid-April. The 10 year German Bund is up 50 bp over the same period from a low of 0.05% to 0.55% at the close Friday.

Quote of the week from Bill Gross: Funny how bonds were labelled “certificates of confiscation” back in the early 1980’s when yields were 14%. What should we call them now?

The US unemployment rate fell to 5.4% in April and 223,000 new Jobs were created. Average hourly wages grew 3 cents to $24.87 and were up 2.2% from a year earlier. Wage gains are picking up from the 2% level we have seen over the past few years.

Conservative Prime Minister David Cameron won an unexpected majority of seats in elections in the UK on Thursday. The pound and FTSE stock index gained 2% on the news.

ISI notes: “The result means that economic risks fall, with the Conservatives trusted by markets to pursue ongoing fiscal consolidation and avoid tax hikes and excessive regulation. However, political – constitutional risks increase, with Britain’s membership of the EU likely to be put to a “Brexit” referendum and Scotland’s long term future in the UK put under new strain following a sweep by the separatist Scottish Nationalist Party in Scotland.”

The total market value of stocks traded across the globe hit a record $74.7 trillion at the end of April. That roughly matches the size of the world economy for 2015, or $74.5 trillion, according to the IMF. The percentage of total market cap relative to the world’s GDP is closely followed by Warren Buffett, and is known as the “Buffett index.” It’s 169% in the US and is high historically speaking.

I attended a Strategic Investment Conference sponsored by John Mauldin (he writes a free weekly investment newsletter Thoughts from the Frontline). He hosted quite a star studded cast of macroeconomists and futurists in San Diego. Here were six takeaways:

  1. Everyone was confused about negative rates overseas and thought them unsustainable.
  2. The US economy is OK. Less financial leverage and more regulations make the economy less volatile but a slow grower. Consumers haven’t spent the “oil windfall” as they don’t view it as “permanent” – yet. US interest rates will rise – slowly.
  3. George Friedman (Stratfor) thinks that the 28 nation Eurozone is in trouble and will split apart amidst right-wing extremism, high unemployment in the periphery vs. Germany and growing resentment against immigrants in Britain and France.
  4. Ian Bremmer (Eurasia Group) sees the US pulling back as the world’s policeman, with the result an unstable and dangerous world. The US has no coherent foreign policy. Our allies don’t trust us – including Canada!
  5. China remains a wildcard with lovers and haters. It is definitely slowing from 7% to 6% to 5% probably, but the Government has many levers to pull.
  6. The futurists – like Peter Diamandis, author of Abundance, are enthralled by innovation, technology and disruptive change. They think the future is bright while the economists live up to their moniker as “dismal scientists”.

APCM is hosting national speaker Patty Kreamer on “Organizing your work and your life” as part of the Empowered Women Smart Money Speaker Series. If you would like to attend please email amber@apcm.net for this May 17th event at the Petroleum Club of Anchorage.

This Sunday is Mother’s Day.

Jeff Pantages, CFA®
Chief Investment Officer

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