The Storm Clouds are Gathering

Storm Clouds are Gathering

This past week I received the blessing of being in a wedding rehearsal that lasted over three hours. That’s right… THREE HOURS! Why did it last three hours? Simple– poor planning (or a lack of seemingly any planning!). Unfortunately, the bride and groom were so busy with the other aspects of their lives that they hadn’t really put much effort into planning their own wedding! So, confusion and chaos reigned.

As I stood in the church I pondered what other aspects of this couple’s lives might look like- and, of course, their finances. Had they established and funded an emergency cash reserve (and invested it in a place other than their checking account)? Were their vehicles, home, lives and incomes covered with the proper types and amounts of insurance? Had they identified their retirement goals and what it would take to reach them? Was consideration given to how they could lower their tax burden? Was there a will in place to ensure their children, wealth, & belongings went to the people they’d want to see it distributed to? And was there a pizza joint open this late that could bring me a sausage and pepperoni pie?

Not having a financial plan is not a crime- but having a good one can sure ease the stress- and probably help you reach your goals sooner. Indeed, a good, comprehensive financial plan does all of these things -minus the pizza- although I have had pizza over planning meetings with clients too, so maybe it does include a pizza :)

The Prior Month

Stocks recovered in July to hit new all-time highs. By the end of the month the S&P had risen 5% to 1686. Treasuries finally leveled off a bit after steep losses the last few months as prices fell just a tad. Ten year U.S. treasury note yields rose from 2.48% to 2.59%. Second quarter earnings have been largely in-line to slightly above expectations despite a slowing world economy. With 393 of the 500 S&P 500 companies having reported, 73% have “beat” on earnings with just 55% “beating” expectations on revenues. The outlooks for the third quarter and full year 2013 provided by CEOs are largely in-line with current expectations as well.

This Month

August is here and that means vacation for most Wall St. types. Don’t stray too far, though, we’re seeing some disconcerting signs. First, the drop in June after a long steady advance make it easy for the market to set up what are called “negative divergences.” These negative divergences are now registering across a variety of indices as they reach new price highs- not good. Furthermore, high yield bonds have failed to make new highs- which is often a sign of coming weakness for the broader market. We’re seeing less stocks trading above key moving averages as well- meaning leadership is narrowing- not good. But while chances for an autumn correction seem to be increasing, we’re not pushing the long-term panic button as of yet.

Market Lesson

The price of bonds moves in opposite direction to their current yields (or interest rate). So, when you hear that interest rates are going to go higher, it follows that the price of bonds will fall. This relationship is important to understand as interest rates have fallen for over two decades now. Falling interest rates have meant rising bond prices– which most investors have taken as a positive– seeing their bond investments appreciate in value. However, if interest rates rise going forward (which most expect), these same investors will see the prices of their bond investments fall. The way to best combat this is by purchasing bonds that mature very quickly (called “short-term” bonds). Buying a “long-term” bond would then be the worst possible investment (and the one prone to the largest price drop).

Fun Fact

Tug-of-war was an olympic event between 1900 and 1920.

Have a great August,
Steve Zakelj
Financial Advisor

“Investing your money the way you would if you knew what I knew”

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