Stocks and bonds tumbled worldwide last week, as investors reacted to stretched valuations and the ongoing fear of the U.S. Federal Reserve's "tapering."
-Dan Denbow, associate vice president, USAA Investments
Stocks and bonds tumbled worldwide last week, as investors reacted to stretched valuations and the ongoing fear of the U.S. Federal Reserve's "tapering." As early as September, the Fed may reduce its $85 billion monthly rate of bond purchases. The S&P 500 index closed the week at 1,655.84, down 2.04%.
The 10-year Treasury yield finished the week at 2.83%, up .25%. Gold enjoyed a strong rally, closing the week at $1,376.87 an ounce, up 4.75%.
Last week was heavy on economic news. Through our lens, we see a slow-growing economy, with a rebound in housing but new building activity still at depressed levels, a gradually healing labor market, a relatively weak consumer and low inflation.
Housing numbers exhibited some softness, with mortgage applications being affected by the recent backup in interest rates and falling 4.7% for the week ended Aug. 9, the lowest level in more than two years. Housing starts rose at an 896,000 annual rate in July, slightly less than expected but higher than June.
Consumer spending is growing but at subpar levels. July retail sales were up 0.2%, less than expected, although June's numbers were revised upward. Consumer sentiment fell in August, as measured by the five-point drop in the University of Michigan survey to 80.0.
The labor market is gradually improving. Weekly initial jobless claims hit a six-year low of 320,000 this week, an encouraging sign.
Inflation remains contained, but we note that it is a lagging indicator, and we wonder whether it can continue to remain low given the Fed's massive money printing. The consumer price index for July was up 0.2% month over month and up 2.0% year over year. The market's forecast of inflation for the next 10 years has crept up over the past two months to 2.18%, as measured by the difference between the yield on U.S. Treasury bonds and U.S. Treasury Inflation-Protected bonds.
As we approach September, we expect market volatility to increase, as there are several significant events coming up. The Sept. 17-18 Federal Open Market Committee meeting will be closely watched for signs of tapering, with a majority of market strategists currently forecasting a tapering announcement following that meeting.
The U.S. debt ceiling is approaching, and we expect a heated debate regarding potential spending cuts when Congress reconvenes next month. And depending upon the results of the Sept. 22 German elections, investors may have some renewed clarity regarding the European Union's policy toward future bailouts for troubled eurozone countries.
It appears that German voters are getting "bailout fatigue" associated with large payments going to countries that are capital-starved, and bailout countries are getting "austerity fatigue" from the spending cuts that are tied to their receipt of receiving financial aid.
USAA Investments Managed Portfolio Outlook
Our view of caution toward risk assets remains unchanged. We remain slightly overweight in bonds and cash in our diversified managed portfolios. For investors interested in income-oriented bond investments, the USAA Intermediate-Term Bond Fund, the USAA High Income Fund and the USAA Income Fund are examples. For investors interested in tax-free income, the USAA Tax Exempt Long-Term Fund, the USAA Tax Exempt Intermediate-Term Fund and the USAA Tax Exempt Short-Term Fund are examples.
We also have a small position in gold and precious-metals mining stocks, which we view as attractive as a long-term inflation hedge. For investors seeking exposure to precious-metals mining stocks, the USAA Precious Metals and Minerals Fund is an example. The USAA Real Return Fund also provides potential protection against the risks of long-term inflation.
Emerging markets represent another opportunity. Though they were hit especially hard recently, we believe that emerging markets remain attractive. They offer both an interesting long-term prospect for growth and compelling valuations. The USAA Emerging Markets Fund offers exposure to stocks in less-developed countries.
As always, we encourage investors to speak with one of our financial advisors, who can help determine which investment vehicles are best suited for you based upon your individual goals, objectives, risk tolerance and time horizon.
Economic Releases Scheduled for This Week
- Mortgage applications
- Existing home sales
- Initial jobless claims
- Conference Board of Leading Economic Indicators
- New home sales
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