Stocks edge higher but Greece default fears rise

Don’t limit investing to the financial world. Invest something of yourself, and you will be richly rewarded.  – Charles Schwab

After three consecutive losing weeks, the major stock averages finally broke into the win column last week and finished slightly higher. The gains would have been much better had the week ended on Thursday, but news on Friday that the International Monetary Fund (IMF) and Greece ended their talks without an agreement sent stocks tumbling. By abandoning its talks with Greece over its bailout program, the IMF sent a message to the country that it needed to compromise or suffer the consequences of bankruptcy and an exit from the euro zone. The S&P 500 Index had been up almost 1% prior to the news and ended the week virtually flat, up just one point. At first glance, the possibility of a default by Greece can rattle investors’ nerves as they fear that other financially unstable countries in Europe might follow suit. But Greece is a very small country with an equally small economy whose fiscal problems have been well-known and documented for a long time. It does not pose the same risk today as it did in years past.  Prior to the news on Greece, the stock market had been boosted by the U.S. retail sales report for May, which increased 1.2% as sales of automobiles and gasoline were strong. Retail sales in March and April were also revised higher, providing further evidence that the economy has regained momentum. Other economic news was also positive. Although jobless claims rose slightly for the week, they remain near a 15-year low. The small-business optimism index jumped to its highest level since December and the preliminary University of Michigan consumer sentiment index for June was also better than expected. Much of this optimism can be attributed to recent wage gains and expectations for continued low inflation. While U.S. economic data continues to confirm a stronger, more vibrant economy, the stock market will likely be held hostage by Greece until the next deadline, an expiration of its bailouts on June 30^th. 

Last Week

Other economic data released last week included the produce price index (PPI), which jumped 0.5% in May due to a temporary spike in the cost of gasoline and other fuels. This was the largest gain since September 2012 but will likely prove transitory. The core PPI, which excludes food and energy, actually fell in May and has risen only 0.6% in the last twelve months. Similarly, U.S. import prices surged in May by over 1% due to the sharp increase in fuel costs. This was the first increase in eleven months and the largest such increase in more than three years.

At the beginning of April, the yield on the 10-year Treasury Note was 1.87%. On Friday, the yield on the 10-year was 2.39% as stronger than expected economic data, increased wage growth and the fear of a Fed rate hike have all contributed to the rise in interest rates. During this time, the S&P 500 Index has basically moved sideways.

For the week, the Dow Jones Industrial Average edged up by 0.3% to close at 17,898 while the S&P 500 Index inched up 0.1% to close at 2,094. The Nasdaq Composite Index dropped 0.3% to close at 5,051.

This Week

The most anticipated event this week will be the Federal Open Market Committee (FOMC) meeting on Wednesday when the Fed will release its monetary policy statement and issue its forecast for the economy. No major changes are expected and Fed Chair Janet Yellen will probably continue to emphasize that any future changes in monetary policy will be dependent on the release of economic data.

May industrial production and leading economic indicators should be relatively strong while the consumer price index (CPI) for May is expected to show a healthy increase due to a temporary spike in the price of gasoline and other fuels.

The earnings calendar remains quiet this week with Adobe Systems, Oracle, Fed Ex, CarMax and Kroger being the most notable companies scheduled to report earnings.

Portfolio Strategy       

As interest rates have climbed since the beginning of April, it’s been a painful ride for investors in longer-term municipal bonds and taxable fixed income securities as principal values have gradually eroded. Municipal bonds have also suffered from negative headlines about the financial condition of Puerto Rico and Chicago as well as a huge issuance of new supply that has caused prices to fall and yields to rise. For those investors with excess cash and maturing bonds in their portfolio, many of these bonds are becoming more attractive. In fact, lower rated single-A and triple-B rated municipal bonds, which are considered investment grade, have very attractive yields for those investors in the highest tax bracket. For those investors looking for longer-term bonds with maturities beyond ten years, a triple-A rated municipal bond can even yield more than a comparable U.S. Treasury, even before taking into account the income tax benefit. Recent weakness in municipal bond prices could represent a buying opportunity and set the stage for above-average price appreciation. To help mitigate interest rate risk if rates rise further, either a barbell approach using both short- and long-term maturities or a simple ladder of maturities are two strategies that could be employed.