What happened in the stock/bond markets last week (7/14-7/18)?

Stock Market Analysis

Conclusions: It was a roller coaster ride for the stock market this past week as large cap stocks inched higher. The S&P 500 index gained 0.56% while smaller companies of the Russell 2000 index lost 0.71%. For the first time in three months we had trading volume exceed 700 million shares three times in one week. However, overall volume remained slightly below average.

The housing industry unexpectedly declined as housing starts fell over 9% in the month of June. The “housing recovery” still has its woes as weakness in home starts and building permits continue. However, housing does have some bright spots. The traffic of prospective buyers, a good gauge of future growth in housing, hit a six month high and could also be the reason behind the recent rise in existing homes sales the last couple of months.

Individual investors continue to pour billions into equity funds as sentiment remains high. From the beginning of 2013 through the end of June 2014 the Investment Company Institute reports equity funds only had one month of negative cash flows. The strong increase in equities prices over the past several years has investors gaining confidence in the markets again, however this is often a signal markets might be overpriced and topping.

Earlier this year we noted that 2013 saw very little volatility as the S&P 500 index never had a correction of 10% or more. The trend carries on in 2014 as the market trends higher and volatility remains subdued. Nevertheless, this past week we saw a glimpse of what can happen when investors and markets get complacent. The tragic event on Thursday with the terrorist attack on a Malaysian airliner is one example of an event that can have a dramatic impact across the market. Stock prices tumbled on the news and the VIX index (a measure of volatility for the S&P 500 Index) shot up over 32%; one of its biggest gains in history. Investors may be optimistic for the future but as Thursday showed they may still recall 2008 and are not hesitant to exit the markets quickly if needed.

Our intermediate leading indicators are unfavorable and have been weakening over the past few weeks. We would suggest caution at this time and recommend trimming accounts that are overextended in equities in order to get back to appropriate targets.

Trent Dysert

Bond Market Analysis

Conclusions: It was another volatile week in the stock market but the bond market offered excellent shelter. The 10 year U.S. Treasury Bond rallied in price and ended the week at 2.50%. The U.S. Treasury yield curve continued to flatten between many maturities, perhaps signaling an outlook for lower than expected economic activity. The U.S. Dollar index rose about 0.5% on the week in response to economic and international reports.

Internationally, the flight to safety was strong as German Bonds reached all-time low yields this past week. The Russian Ruble dropped the most in 3 years on Thursday upon reports of new punitive sanctions and the tragic plane crash in Ukraine.

Economic reports were mixed on the week. New Housing Starts and Permits were less than stellar and the drop was the largest in relation to expectations going back to January of 2007. Multi-family units which have been the source of strength in recent reports were also far less than expected.

However, the Philadelphia Fed Index posted an extremely strong headline number and the new orders component was the strongest in the past 10 years. Unfortunately, some of the sub-indices were showing signs of weakness such as in the employment index, the length of the workweek, and future capital expenditures.

The headlines reported that the number of Initial Jobless Claims were better than expected this week with 302,000 initial claims reported versus 305,000 last week. Disquietingly though, non-seasonally adjusted initial claims actually rose by 47,000. As a sign of the weakness in economic activity, we are still above the 300,000 mark that has historically marked the beginning of prior recessions.

Goldman Sachs issued a report that showed that productivity in Q1 2014 was the lowest in almost 70 years. The report also notes that long term averages of productivity are also lower than they have been in the past. If this trend continues the median income in the U.S. will also likely continue to be weak.

Presently our indicators for bonds are favorable. We would recommend staying with higher quality bonds and maintaining moderate duration levels.

Matt Watson

 

Optio suscipit dolore omnis est minima ea veniam. Ipsum deleniti eligendi rerum eum tempora enim. Libero eius quia cumque neque dolorum.

Career Advancement Opportunities

March 2024 Investment Banking

  • Jefferies & Company 02 99.4%
  • Goldman Sachs 19 98.8%
  • Harris Williams & Co. (++) 98.3%
  • Lazard Freres 02 97.7%
  • JPMorgan Chase 03 97.1%

Overall Employee Satisfaction

March 2024 Investment Banking

  • Harris Williams & Co. 18 99.4%
  • JPMorgan Chase 10 98.8%
  • Lazard Freres 05 98.3%
  • Morgan Stanley 07 97.7%
  • William Blair 03 97.1%

Professional Growth Opportunities

March 2024 Investment Banking

  • Lazard Freres 01 99.4%
  • Jefferies & Company 02 98.8%
  • Goldman Sachs 17 98.3%
  • Moelis & Company 07 97.7%
  • JPMorgan Chase 05 97.1%

Total Avg Compensation

March 2024 Investment Banking

  • Director/MD (5) $648
  • Vice President (19) $385
  • Associates (86) $261
  • 3rd+ Year Analyst (13) $181
  • Intern/Summer Associate (33) $170
  • 2nd Year Analyst (66) $168
  • 1st Year Analyst (202) $159
  • Intern/Summer Analyst (144) $101
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”