Download Weekly Advisor Analysis 06-24-13 PAA

Weekly Advisor Analysis
June 24, 2013
Investors Throw a Taper Tantrum
The S&P 500 declined over 2.3 percent last week, according to CNBC, as investors
indiscriminately shed their portfolios of assets following Ben Bernanke’s press conference
Wednesday afternoon. In that press conference, and the Federal Open Market Committee official
statement, Bernanke again reminded the financial markets the Federal Reserve intends to begin
tapering their $85 billion per month asset purchase program as the economy continues to heal. The
S&P 500 had its worst performing day of 2013 on Thursday, and yields on the 10-year Treasury
notes climbed above 2.5 percent for the first time in nearly two years, according to CNBC.
Source: Yahoo! Finance
Life After the Fed
Leading up to last Wednesday, investors were beginning to consider the possibility that the U.S.
was about to enter an economic environment with rising interest rates. For more than a halfdecade, U.S. investors have only experienced Bernanke and the Federal Reserve slashing interest
rates and raising asset purchases in an attempt to aid what has been a tortuous and slow economic
recovery following the last recession. Although Bernanke clearly hinted last month the current
asset purchasing program was nearing an end as the economy continues to gain steam, many
investors didn’t fully believe the economy was improving enough to warrant the reduction. That’s
mainly why the markets reacted the way they did on Wednesday and Thursday. Many people were
caught off guard as the Federal Reserve raised its estimates for economic growth in 2014,
indicating the asset purchasing program will likely conclude sometime next year should their
estimates become reality.
Analyzing the Fed’s Economic Outlook
Despite the large declines in the equity markets on Wednesday and Thursday of last week, the
effects of a potential change in Federal Reserve policy on the fixed income market have been
much harsher. The yield on the 10-year U.S. Treasury bond has now soared from 1.6 percent at the
beginning of May to just below 2.5 percent as of the end of last week, according to CNBC. This
has pressured the prices of bonds lower which move inversely to interest rates. Although the
Federal Reserve believes they won’t begin officially raising overnight lending rates to banks until
2015, investors are pricing a future environment of higher interest rates into the markets today.
This is a positive for savers, who have struggled for years to earn much income on their assets.
However, individuals and companies who regularly rely on borrowing may find their interest
payments rising in the near future. For instance, mortgage rates climbed as high as 4.25 percent on
Thursday, up from a multi-decade low of 3.5 percent in May, according to The New York Times.
China’s Cash Crunch
According to CNBC, Chinese money markets became severely illiquid last week, meaning banks
and other lending institutions struggled to borrow at a reasonable rate. Interbank lending rates
soared to record highs of above 10 percent and other overnight lending rates climbed beyond 30
percent as the Chinese Central Bank refused to pump cash into the markets. China’s government
has been attempting to curb potentially excessive and dangerous lending practices in an effort to
shift economic growth away from fixed asset investment and more towards consumer spending.
However, a potential problem which can arise when financial institutions become illiquid is that
business activity can seize up due to extraordinarily high borrowing costs. Furthermore, this can
result in slower economic growth at a time when China’s economy is already decelerating. It
appears by not taking action, China’s leaders are more focused on the longer term reforms of the
economy than meeting shorter term economic forecasts. Not surprisingly, on Thursday economists
at HSBC cut their 2013 forecast for China’s GDP growth rate to 7.4 percent from the previous
estimate of 8.2 percent.
Best regards,
UDB Financial
Securities offered through LPL Financial, Member FINRA/SIPC.
* This newsletter was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the
named broker/dealer.
* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be
representative of the stock market in general.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the
U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark
for the long-term bond market.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific
periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to
predict future performance.
* Past performance does not guarantee future results.
* You cannot invest directly in an index.
* Consult your financial professional before making any investment decision.
Sources:
http://www.cnbc.com/id/100834381
http://finance.yahoo.com/q/bc?s=%5EGSPC&t=5d&l=on&z=l&q=l&c=
http://www.federalreserve.gov/newsevents/press/monetary/20130619a.htm
http://blogs.wsj.com/economics/2013/06/19/parsing-the-fed-how-the-statement-changed-31/
http://www.washingtonpost.com/blogs/wonkblog/wp/2013/06/19/liveblogging-the-fomc-and-bernankespress-conference/
http://s.wsj.net/public/resources/images/OB-XW383_chart__NS_20130617135505.png
http://www.cnbc.com/id/100834141
http://www.nytimes.com/2013/06/21/business/mercurial-mortgage-rates-to-stabilize-soon-analystssay.html?_r=0
http://s.wsj.net/public/resources/images/OB-XY205_RATES_E_20130621172858.jpg
http://www.cnbc.com/id/100830406
http://www.reuters.com/article/2013/06/20/chinagdp-brief-idUSWNAB022A420130620
http://www.bloomberg.com/image/ikz7iNxyEUqY.jpg
http://chart.finance.yahoo.com/z?s=%5eGSPC&t=5d&q=l&l=on&z=l&a=v&p=s&lang=enUS&region=US
http://s.wsj.net/public/resources/images/OB-XW383_chart__NS_20130617135505.png
http://s.wsj.net/public/resources/images/OB-XY205_RATES_E_20130621172858.jpg
http://www.bloomberg.com/image/ikz7iNxyEUqY.jpg