Important Updates for Investors
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The
Silver Lining to a Falling Dollar
Despite the U.S. national debt, there is a silver lining for income
investors. This massive spending, combined with movement out of U.S.
Treasuries, is going to take its toll on the dollar, and
international income investors could reap the rewards in the form of
higher dividends. |
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| Mid-Month
Market Snapshot |
Published: July 15, 2004
Stocks -- REITs rally as broader
market declines
Now that the Fed has raised its key overnight lending rate by an
as-expected quarter of a percentage point, a major source of uncertainty
is behind us. (The Federal Funds Rate is the rate banks charge each
other for overnight loans.) The markets also breathed a sigh of relief
as the Fed governors announced they would raise rates at a
“measured” pace, allowing the economy to continue strengthening.
Markets rallied strongly on the day of the Fed’s June 30th
announcement, but the rally quickly fizzled as an uncertain economic
outlook weighed on stocks. For the first two weeks of July disappointing
earnings reports from the tech sector, weak economic data, rising oil
prices and renewed terrorist concerns all combined to keep investors on
the sidelines. As a result, the market took on a bearish tone and the
S&P 500 index closed -2.5% lower between June 30th and July 14th.
The Dow Jones Dividend Index reflected the broader market averages, but
dropped less sharply. The index closed at 633.95, down -1.3% during the
same time period. Meanwhile, the real estate sector continued to
strengthen in the face of a market decline. The Dow Jones Equity REIT
Index actually rose by 12 basis points to finish at 190.81 on Wednesday
evening.
Bonds -- Bond markets tread water ahead of inflation
reports
Following the Fed rate hike, banks raised their prime lending rate by a
quarter of a percentage point to 4.25%. Although the prime rate
influences consumer borrowing rates for everything from credit cards to
personal loans, consumers should feel little impact, according to the
American Bankers Association. The cost to consumers of a quarter
percentage point rate hike is about $2.50 a year on $1,000 of debt --
less than the cost of a latte!
The rate hike also triggered a short-term spike in the returns on bank
deposit products such as CDs (certificates of deposit), savings
accounts, and money market accounts. The average yield on three-month
CDs rose to 1.56% on June 29-30th, but retreated to 1.51% the next day.
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Bonds turned higher and their yields fell sharply
after the Fed confirmed it would raise interest rates at a
“measured” pace. Yields on the benchmark 10-year Treasury, used in
setting mortgage and corporate lending rates, fell from a two-year high
in mid-June of 4.87% to a two-month low of 4.41% in early July. Bonds
remained largely unchanged during the first two weeks of July as traders
waited for a clearer reading on the inflation outlook. (Rising inflation
erodes the value of bonds, leading to lower prices and higher yields.)
Bonds declined slightly on July 14th and yields gained ahead of key
inflation reports due later in the week. Looking back at the last few
weeks, yields on the 10-year Treasury have fallen 14 basis points from
June 30th, closing at 4.48% on July 14th.
Over the past two weeks, as the yield on 10-year Treasury notes has
slipped, the slope between the two-year and 10-year Treasury notes has
continued to flatten. The flattened yield curve is an indication that
the markets are treading water until they have a clearer sense of the
economic and inflationary outlook.
Outlook -- Dividends set to grow as profits increase
In the coming weeks, Wall Street will be watching closely for any signs
of inflation. The pace of inflation will influence future interest rate
decisions by the Federal Reserve. The July 16th Consumer Price Index
report and the second-quarter gross domestic product (GDP) numbers on
July 30th are expected to signal how fast the economy is heating up.
Right now, the financial markets are expecting inflation to proceed at a
moderate pace and the Fed to raise the Fed Funds Rate a modest quarter
of a percentage point at each of its next four meetings, reaching 2.25%
by year-end.
Despite the recent spate of weak economic news, Kansas City Fed
President Thomas Hoenig, a member of the Fed’s rate-setting committee,
said he expected the economy to grow at a healthy 4.5% pace this year
and for inflation to remain comfortably below 2%. That scenario would
provide the best of all possible worlds for dividend-paying stocks.
Fuelled by healthy corporate profits and reduced dividend taxes, a
record number of companies have boosted their dividends this year. The
first six months of 2004 saw the largest number of companies raising
their dividends in any first-half-year period in the past five years,
according to a Standard & Poor’s research report. Projecting a
strong profit outlook, the research firm expects this rising dividend
trend to continue for the balance of the year.
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Please Note: The above article was merely a
small excerpt from an issue of our premium income newsletter -- High-Yield
Investing. In each issue Carla Pasternak presents
a wealth of information and timely investment ideas to help you earn a
steady income stream from your investments. To receive a
complimentary three-week trial or to learn more about our High-Yield
Investing service, please visit the following link: http://www.StreetAuthority.com/subscribe.asp#hy |
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