As the second quarter winds to a close, investors are on edge waiting for third quarter economic data and second quarter corporate earnings results that will report next week to gain more clarity about the health of the economy.
In June U.S. equities experienced more volatility with wider trade swings and a first time monthly loss of one percent in 2013 for all three U.S. equity indexes while the market digested a broad range of comments from Fed officials about the possibility of the Fed tapering its quantitative easing program as the U.S. economy adjusts to moderate growth and shrugs off the fiscal drag from federal government sequester cuts and higher taxes.
Even with the June equity pullback of over one percent, U.S. equities in 2013 are still experiencing positive returns in the 12-14 percent range for all three major U.S. indexes (Dow, S&P 500, Nasdaq) with 2nd quarter returns between 2-4 percent.
With interest rates hovering around zero and the 10 year Treasury yield jumping to a 22 month high at 2.6 percent in June, up from 1.6 percent in early May, a near historic low, savings and bond returns are less appealing for many investors seeking to exit the equity market because of recent uncertainty over the Fed’s quantitative easing program which helped to fuel higher returns in U.S. equities.
“I have been saying for a while that it’s one thing to be sitting in bonds and under-performing the stock market, its quite another if your sitting in bonds and you’re getting hit and you’re starting to feel pain. This is the first year in this recovery really that we have brought pain to holding bonds and I think that’s going to cause a lot of people to reevaluate what their appropriate asset allocation is going to be” said James Paulson, chief investment strategist from Wells Capital Management during CNBC’s Squawk On The Street aired last Wednesday.
“One of the things after a period of digestion, I personally think the bond yield is going up to 3.0 percent yet this year on the 10 year, not in a straight line, but I think it might get there by the end of the year. I think that sets up 2014 with a lot of people making the reallocation back towards equities and away from bonds maybe to some extent realizing that bonds don’t just provide low risk they also can give you risk if you’re in a different environment that we find ourselves just now entering” Paulson added.
Chris Baggini, senior portfolio manager from Turner Investments, said last week on Bloomberg’s Taking Stock with Pimm Fox that he likes equities out of all the asset classes, suggesting that the equity market is where the funnel is pointing investors to amid an economic environment that is witnessing bonds and commodities losing their luster.
“People who have sold bonds are probably rotating into cash in the short-term basis and realize that cash is really not where its at….. you’re not earning any money there and you have a risk of losing money in bonds.
Bonds are actually beaten down pretty hard on a year to date basis when people get their statements in July for the first half of this year” Baggini said.
“I think they’re going to have to come back to stocks. They’re reasonably priced and if we see any bottoming process in Europe whatsoever, any bottoming process in China whatsoever, maybe a little improvement in the U.S. in the second half of this year, I think that stocks are going to look very appealing to most investors” Baggini added.
But not all investors are ready to give up and jump off the bond ship.
Bill Gross from Pacific Investment Management Co (PIMCO) is encouraging Pimco’s bond investors to not give up.
“Don’t jump ship now. We may have reached an inflection point of low Treasury, mortgage and corporate yields in late April, but this is overdone” Gross wrote to his investment community at PIMCO.
Gross believes that yields on the 10-year Treasury adjusted too much and may be as much as 35 basis points too cheap since Fed Funds futures markets are predicting a 75 basis point yield in 2015, and Euro dollars are validating a similar conclusion.
“They belong in our opinion at 2.20% instead of 2.55%” Gross stated.
China Manufacturing Data
Recent data out of China over the week-end indicates that the Chinese manufacturing is slowing. China’s purchasing manager’s index (PMI) for June showed a reading of 50.1, down from 50.8 in May and 50.6 in April but slightly higher than the forecast of 50.0.
HSBC’s China Manufacturing PMI showed a contraction reading of 48.2 in June, a 9 month low, down from 49.2 in May and 50.4 in April.
U.S. Economic Calendar
This week is a shortened trading week with the U.S. markets closing early on Wednesday at 1:00 p.m. ahead of Independence Day on Thursday, a U.S. holiday that will see the market closed.
U.S markets will re-open on Friday with the closely watched jobs report for June
10:00 a.m. Construction spending
10:00 a.m. ISM Manufacturing
10:00 a.m. May Factory Orders,
7:00 a.m. Mortgage Applications
8:15 a.m. June ADP
8:30 a.m. Trade Balance
8:30 a.m. Jobless Claims
10:00 a.m. ISM non-manufacturing
8:30 a.m. June jobs report