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GUEST COMMENTARY- Eye on Wall Street- Surfs up for in
<html>Stock market investors in the U.S. and overseas are grabbing their surfboards and riding a wave of liquidity provided by central banks. In the U.S., the economy is growing at a modest pace despite a slowdown in government spending. The S P 500 was up 2.3 percent in May and 15.4 percent year-to-date.
In Japan, aggressive fiscal and monetary policies have the economy expanding. Stocks declined last month, but since the start of the year the Nikkei has seen a dramatic rise of 33.6 percent in yen, and a more muted gain of 14 percent in dollars due to yen depreciation. While the eurozone has now been in a mild recession for six quarters it may be bottoming as financial markets are improving. Germany has agreed to help some of its southern neighbors as the commitment to austerity seems to be waning. The Stoxx 600 gained almost 1 percent last month and is up 8.2 percent year to date. Bond wipe out! Bonds had a bit of a wipe out in May. Ten-year Treasury yields ended the month at 2.16 percent, up almost 50 basis points. That worked out to a total return of 3.7 percent, the worst monthly performance since December 2010. Better economic growth and worries over an early end to quantitative easing led to the selloff. The decline in bond prices certainly hasn t been because of rising inflation. The U.S. inflation rate has recently declined from over 2 percent to 1.1 percent year-over-year. Inflation overseas is also falling. That s partly due to the decline in commodity prices. While oil is flat year-to-date, metals including gold and copper have taken it on the chops. At this juncture, rising interest rates probably won t hurt stocks much. That s especially true if the increase in rates is because of faster economic growth that should help company earnings and sales. J.P. Morgan notes during the previous 50 years, when yields are below 5 percent, rising rates are generally associated with rising stock prices. But interest rates are at historic lows and that has many worried that investors who have poured money into bond funds over the past several years are in for a rude awakening if rates continue to rise. Bonds are overvalued and we have de-emphasized them in portfolios a bit. But remember, in a crisis, when there is a flight to quality, there is nothing like owning high quality bonds. They gained 13.7 percent in 2008 while stocks lost 37 percent. It is important to look at assets not on a stand-alone basis but in the context of a whole portfolio. High quality bonds serve as insurance and act as ballast in stressful market environments. Here s what Vanguard had to say in a recent post titled A look at today s bond market: Each asset class really does have a particular role to play in investor portfolios. Stocks are there for growth potential beyond inflation. With that potential growth comes potential volatility. Bonds are really there to help moderate that volatility and to help mitigate stock market risk and also to produce some income. Cash is there for short term spending needs and preservation of capital. The markets don t perform in tandem so by holding a mix across different asset classes you can participate in the strong performing ones but also mitigate the weaker ones in your overall portfolio. APCM uses 11 asset classes (primarily low cost index funds) as a way to get diversification and better balance in portfolios. They include traditional domestic and international stocks and bonds, commercial real estate,Nike Lions 9 Stafford White Limited Jerseys, commodities, and inflation protected bonds among others. Now,Week in Review- April 26, if you are a bond only investor and are looking for income, I feel your pain. The Federal Reserve seems bent on keeping rates low to assist the economy and help out borrowers. But that penalizes savers! Our best advice is patience. Diversify your bond portfolio, pay attention to taxes (own muni bonds),Wranglers part ways with head coach, and don t stretch for yield now. Avoid long bonds, which have considerable price risk. Jeff Pantages, CFA, is the chief investment officer for Alaska Permanent Capital Management,[1], a $2.4 billion investment management and advisory firm located Anchorage.</html>