With the temperatures rising there have been some interesting developments in the last week. Utility Stocks, Bonds and Real Estate Investment Trusts(REITS) have run into trouble, pulling back anywhere from 3%-8%. The chief reason is concern from market participants that the improving U.S. economy may force the Federal Reserve to slowly reduce the financial stimulus programs that are in effect. It has been no secret that markets have jubilantly embraced the Fed’s intervention. Even thoughts of a break-up has shaken certain assets in the past week.
We made investment adjustments in advance of the latest market concerns and will continue to monitor the markets closely.
One of the questions I often get asked is why hasn’t higher inflation become a reality with the significant money-printing the Federal Reserve has undertaken since 2009. The biggest reason that inflation has not spiked is due to the fact that banks have kept the money in their vaults rather than lend it out. The chart below shows the total amount of Excess Reserves currently sitting in the largest banks’ balance sheets. Excess Reserves are bank reserves over and above the amount required to be held by regulators. You will notice that each time the Fed has embarked on a Quant Easing(QE) program that the amount of Excess Reserves has quickly moved higher as banks have “stashed the cash”. When the Fed has been on the sidelines Excess Reserves have fallen.
Unless the large banks begin to significantly increase lending to consumers, this extra money will not find its way into circulation and therefore will have a minimal impact on inflation. It is true at some point the Federal Reserve will need to tighten the money supply, but with a fragile economy they have been hesitant to do so. If the economy does continue to improve the onus will be on the Fed to tighten and avoid creating a situation similar to 2001-2005 where the Fed’s easy money policies led to a host of troubles.
Source: St.Louis Federal Reserve
This week we are excited to introduce video to our investment updates. We intro the series and discuss plans for the future. For today, Will answers the question of what is margin debt and why we need to pay attention to it.
In past stock market peaks, margin debt has also peaked. This makes sense as high margin debt indicates extreme confidence from investors that they can earn higher returns from the market than the interest rate they are paying to borrow the funds. Typically this confidence comes after a significant stock market advance. Today, with the stock market at record highs, margin debt is once again hitting a record high. Does this mean the market is facing a sharp decline? One indicator alone can not tell us but certainly the high level of margin debt is something to keep a close eye on.
Plenty of excitement today with the Dow Jones Industrial Average crossing over 15,000 intraday for the first time and the S&P 500 closing above 1600 for the first time, so let’s get to it…
The S&P 500 first hit 1500 back in March 2000. As I just mentioned, today the S&P crossed over 1600 for the first time. It was a long and adventurous road to go from 1500 to 1600. Let’s hope the next 100 points come a bit easier.
With the impressive rally the stock market experienced in the first quarter, we have been watching closely for signs of a pullback much like the market has experienced the last three springs. By and large most of the key indicators have continued to paint a bright picture for the markets. The Labor Department’s jobs report was strong today with a gain of 276k, including upward revisions to February and March. The market loves the current conditions. The economic data is good but not great, which means the Federal Reserve has no reason to slow down their stimulus efforts. This has been the recipe that has been so successful in the last couple years. Of course market conditions can change on a dime and there is no shortage of economic struggles across the globe, which could come to the forefront at any time.
Speaking of indicators, J.C. Parets at AllStarCharts.com is pointing out the current rally has been broad-based, with a high majority of stocks in a technical uptrend. From J.C.:
“This chart shows the percentage of S&P 500 stocks that are trading above their 200-day moving averages. It is very difficult for the market to have any kind of sustainable decline when a high percentage of stocks are trading above their 200-day, and therefore in uptrends.”
The chart shows the percentage of stocks in the S&P 500 that are trading above their 200 day moving average, with the S&P 500 itself below. You can see that the last two market pullbacks have occurred when the percentage of stocks above their moving average have plummeted. Today, this indicator is showing the market rally has broad support with over 88% of stocks in the S&P 500 over their 200 day moving average.