Week Ahead: Asset Class Envy
With all of the celebrations over stock market records these days, you might think that investors are once again partying like it’s the nineties. But most investors learned hard lessons in the near two decades since those halcyon days. The 1990’s-2000 Internet boom and bust, followed by the 2000’s housing boom and bust, along with a once-in-a-generation financial crisis and two associated stock market crashes, cured most investors of their stock-only portfolios. They soon learned the beauty of a diversified portfolio, which can provide comfort during stormy periods of time. But those diversified portfolios are not nearly as comforting when stocks are soaring and bond and commodity markets are falling. That’s why when many investors review their year-end statements, their total gains are likely to be much less than the 30 percent returns of the S&P 500. The main culprit is the bond market, which has taken it on the chin in 2013. The price of the 10-year Treasury has dropped precipitously this year, as yields have soared from a springtime low of 1.62 percent to 3 percent on Friday. The result is a total loss in return of about 2.7 percent for an asset class known as a "safe haven"!
Analysts note that the rise in rates is occurring for a good reason: the economy is strengthening and as a result, the Federal Reserve can slowly get out of the stimulus business. That may be cold comfort for diversified investors, who no doubt are feeling a bit of asset class envy right about now. Let’s just hope that they do not bail out of bonds and jump into stocks at the wrong time, which in hindsight can seem like premature reallocation.
Worrying about losses in bond positions probably seems like a pretty good problem to have, if you are one of the 1.3 million Americans who have just seen long-term unemployment benefits expire. The benefit has paid an average of $300 per week for up to an additional 47 weeks for those who have exhausted the roughly 26 weeks of unemployment benefits that most states provide.
Late last week, Sen. Jack Reed (D-RI) announced plans to introduce a three-month extension of long-term unemployment benefits, and is aiming for a procedural vote as soon as January 6. The $6.5 billion proposal would maintain aid for recipients, who would have their benefits restored retroactively, while buying legislators more time to work out a longer extension. Costs for a full year of extending the benefits are estimated at $25 billion, according to CBO.
Reed has his work cut out for him: Many lawmakers are reluctant to extend benefits unless other cuts are proposed to offset them. Economists caution that cutting long-term unemployment benefits could reduce first quarter GDP by 0.2-0.4 percent.
MARKETS:
- DJIA: 16,478 up 1.6% on week, up 25.7% on year
- S&P 500: 1841, up 1.3% on week, up 29% on year
- NASDAQ: 4156, up 1.3% on week, up 37.7% on year
- 10-Year Treasury yield: 3% (from 2.89% a week ago)
- Jan Crude Oil: $100.32, up 1% on week
- Feb Gold: $1214, up 0.9% on week
- AAA Nat'l average price for gallon of regular Gas: $3.30
THE WEEK AHEAD: The trading week between Christmas and New Year’s is often the lowest volume week of the year. With New Year’s Day falling mid-week, expect the first two trading sessions of 2014 to be equally quiet. Reports from the nation’s housing market, are expected to confirm that the sector is closing out a strong year. The Conference Board’s confidence index is expected to recover from October’s steep drop and November’s slide, both of which were probably due to the government shutdown and debt ceiling drama.
Mon 12/30:
10:00 Pending Home Sales
Tues 12/31:
9:00 Case-Schiller Home Price Index
9:45 Chicago PMI
10:00 Consumer Confidence
Bond markets close early, while stock markets have regular hours
Weds 1/1: GLOBAL MARKETS CLOSED FOR NEW YEAR’S DAY
Hold the sarcasm: Greece assumes the EU presidency from Lithuania
Thurs 1/2:
8:30 Weekly Jobless Claims
10:00 ISM Manufacturing
10:00 Construction Spending
Fri 1/3:
Motor Vehicle Sales