In the wake of statements made overnight by the People’s Bank of China that apparently shows its renewed commitment to adjust interest rates to ease liquidity concerns, markets around the globe responded in a mostly positive manner today. The U.S. indices closed just under 1% higher for the day.
Speaking of the domestic markets, the relaxed Chinese financial worries were not the only positive catalyst that pushed stocks higher in the day’s session; there were a number of economic data points that beat economists’ estimates, spurring optimism from investors and traders. These economic data beats include:
- The Case-Shiller housing price index soared 12.1% year-over-year for April, beating an estimated 10.6% rise.
- The Consumer Confidence index rose to 81.4 versus the consensus estimate of 75.1.
- New home sales rose 2.1% in May; economists were expecting new home sales to rise 1.3%.
- Durable goods orders surged by 3.6% compared to a 3.0% estimate.
It is unclear whether these economic indicators actually show that the economy is improving, but they are still statistics that could make quite an impact on the performance of stocks and bonds, because of how investors and traders interpret the data, and the future of the Federal Reserve’s quantitative easing program.
Reporting earnings before the opening bell today were Walgreens (WAG), Carnival (CCL), and Lennar (LEN). Walgreens’ third quarter results missed analysts’ estimates, and as such investors caused its shares to fall about 6% today. However, Carnival and Lennar shares closed in positive territory following better-than-expected second quarter earnings.
A slew of Wall Street analyst upgrades caused shares of HSBC Holdings (HBC), Nordstrom (JWN), Las Vegas Sands (LVS), Plains All American Pipeline (PAA), Nike (NKE), Boeing (BA), and Kinder Morgan Energy Partners (KMP) to outpace the overall market in today’s trading. Downgrades of Pan American Silver (PAAS), Sunoco Logistics Partners (SXL), and Western Gas Partners (WES) sent those shares into the red early in the day, but the stocks eventually made a comeback to edge higher for the day.
Be sure to check the Dividend Daily for all the latest earnings reports, analyst moves, and much more.Be Careful Who You Listen To
Over the past few months, there have been many big-time fund managers that have made big bets that bonds prices would continue to rise (which means rates would continue to fall). However, this long bond trade has begun to unwind over the past two months, as we have continuously noted. There has been a major sell-off in bonds, as bond investors started to fear that the Federal Reserve would no longer support the market with its massive Treasury and mortgage-backed security buying program. This sell-off has caused interest rates to rise about 100 basis points since the beginning of May. This sort of sell-off can only occur if large institutional investors start to pour out of the market, leaving the individual retail investor in the dust.
Investors always need to keep in mind that when listening to a fund manager’s calls, their past performance is never indicative of future returns. There is no guarantee in coming out on top with substantial returns, no matter who makes the recommendation, even in a perceived risk less investment like bonds.
These fund managers pushing the long bond trade note that the weakness in the global economy, political turmoil, and the decline in inflation expectations should be reasons to invest in bonds going forward. However, as noted above, economic data points continue to show improvement in the economy. If the economy continue to improves, it is only natural that bond prices will fall and yields rise.
Now, you may ask yourself how does this all impact dividend investors? Well, the unwinding of the long bond trade means that yields on bonds will rise, which in turn means that dividend paying equities will have to battle with higher-yield instruments going forward. While dividend investments remain the past way to accumulate long-term wealth, the rise in rates and yields will give income-seeking investors more investment options going forward at rates we have not seen in quite some time. That said, we expect that quality dividend-paying stocks will remain a key investment theme for decades to come, as they have been for many decades before.
Thanks for reading everybody. We’ll see you tomorrow!
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