Monthly Financial Market Update June 1, 2017

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1 Jeremy R. Hofer Hofer & Associates Wealth Management 90 E. Thousand Oaks Blvd #310 Thousand Oaks, CA (805) Monthly Financial Market Update June 1, 2017 The summary below is provided for educational purposes only. If you have any thoughts or would like to discuss any other matters, please feel free to contact me. Missing Mojo Bond Yields Remain Low The Federal Reserve has hiked the fed funds rate three times since it first raised its key lending rate over a year ago. And a closely watched gauge from the CME Group that measures rate-hike sentiment puts odds of a June increase at 95% as of the last day of May. Sure, we ve seen T-bill rates rise modestly and some money funds and CDs have ticked higher, but savers aren t seeing rates anywhere near where they were before the 2008 financial crisis. Notably, longer-term bond yields have actually dipped from recent highs see Figure 1. There are several reasons why yields haven t risen much, and we can lay the blame on domestic as well as global markets. Let s start with the major central banks The Federal Reserve has lifted rates but remains very cautious and continues to promote a gradual ratehike trajectory. But it isn t just the Fed. While the U.S. central bank has begun to tighten, major banks such as the European Central Bank and the Bank of Japan continue hold their key rates at or below zero for shortterm loans. Further, neither bank signaled it may soon shift policy. You see, central banks play an important role in what happens to rates, both in their own countries and in the U.S. As the month ended, the 10-year German bond yielded just 0.30%, and the yield on Japan s 10-year bond came in at a scant 0.05% (Bloomberg). With the U.S. 10-year Treasury above 2%, investors overseas looking for a safe place to park cash can easily boost their yield by buying U.S. bonds, which helps keep a soft lid on U.S. yields (bond prices and yields move in the opposite direction). U.S. inflation

2 Long-term bondholders are wary of any whiff of inflation. If the rate of price hikes were to jump, they could easily be stuck in a low-yielding bond whose annual payout doesn t keep pace with inflation. But inflation, as measured by the Consumer Price Index and the lesser-known PCE Price Index, remains very low. The left-hand side of Figure 1 illustrates the 10-year yield is off last year s low, but it has dropped about one-third of a percentage point from its recent high. Also, note the recent decline in inflation expectations. Treasuries and Infla>on Expecta>ons Percent Fig. 1 Elec>on day Percent year Treasury yield Expecta>on for infla>on out 10 years /30/2016 8/31/ /31/ /31/2016 2/28/2017 4/30/2017 Data Source: St. Louis Federal Reserve Last Date: Expectation for inflation is based on the 10-year breakeven rate of inflation, or the 10-year Treasury yield minus the 10-year TIPs yield. It offers a rough forecast for the annual rate of inflation over a 10-year period, as the difference in yield on a TIPs security and a 10-year Treasury represents the yield an investor is willing to give up for protection against inflation. A U.S. expansion that just can t get out of second gear Not only is weak economic growth a headwind to higher inflation, it acts like a magnet for U.S. Treasuries. If growth were much faster, we d likely see funds flow out of Treasuries and into more productive investments. A flight of capital away from U.S. Treasury bonds would drive yields higher. Remember, the price of bonds and the yield move in the opposite direction. Jump down to Figure 2. It tracks the growth of Gross Domestic Product (GDP), which is the broadest measure of activity for the economy, and compares it with the yield on the 10-year Treasury bond. 1.30

3 Nominal GDP 12-quarter Average and 10-yr Treasury Yield Fig. 2 PERCENT quarter annualized average nominal GDP year Treasury yield (quarterly average) DATA SOURCE: BEA, ST. LOUIS FEDERAL RESERVE LAST DATE: Q Nominal GDP calculates GDP based on current prices. Real GDP, which is how it is typically reported in the media, filters out inflation. Figure 2 illustrates that the 10-year yield loosely tracks nominal GDP. Put another way, subpar GDP has been a headwind to higher yields. Currently, nominal GDP might suggest the 10-year yield should rise. But remember, yields around the globe are low, central banks outside the U.S. are in no mood to raise interest rates, and the Fed continues to signal any rate hikes are expected to be gradual. Index May Return* 2017 YTD Return % DJIA NASDAQ Composite S&P 500 Index FTSE Developed ex North America Index 4 Bond Yields Yield - % a/o May 31 & Change* Yield - % a/o Dec 30, month T-bill year Treasury 1.28 Unch year Treasury year Treasury Commodities May 31 Price, Monthly Change Year end 2016 Oil per barrel 5 $ $53.89 Gold per ounce 6 $1, $1, Sources: U.S. Treasury, MarketWatch, St. Louis Federal Reserve, CNBC * Monthly: April 28, 2017 May 31, 2017 Bottom line there are technical factors that also influence the daily inflows and outflows out of bonds. While volatility in rates can t be ruled out, the major influences on today s low-rate environment have yet to abate.

4 If you have any questions or thoughts, please feel free to reach out to me. Warmest Regards, Jeremy R. Hofer Share! It s OK with us if you would like to share the Market Update with your friends, family and neighbors. We love meeting new folks! It is important that you do not use this to request or authorize the purchase or sale of any security or commodity, or to request any other transactions. Any such request, orders or instructions will not be accepted and will not be processed. All items discussed in this report are for informational purposes only, are not advice of any kind, and are not intended as a solicitation to buy, hold, or sell any securities. Nothing contained herein constitutes tax, legal, insurance, or investment advice. Stocks and bonds and commodities are not FDIC insured and can fall in value, and any investment information, securities and commodities mentioned in this report may not be suitable for everyone. U.S. Treasury bonds and Treasury bills are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. U.S. government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Treasury bills are certificates reflecting short-term (less than one year) obligations of the U.S. government. Past performance is not a guarantee of future performance. Different investments involve different degrees of risk, and there can be no assurance that the future performance of any investment, security, commodity or investment strategy that is referenced will be profitable or be suitable for your portfolio. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Before making any investments or making any type of investment decision, please consult with your financial advisor and determine how a security may fit into your investment portfolio, how a decision may affect your financial position and how it may impact your financial goals. All opinions are subject to change without notice in response to changing market and/or economic conditions. 1 The Dow Jones Industrials Average is an unmanaged index of 30 major companies which cannot be invested into directly. Past performance does not guarantee future results. 2 The NASDAQ Composite is an unmanaged index of companies which cannot be invested into directly. Past performance does not guarantee future results. 3 The S&P 500 Index is an unmanaged index of 500 larger companies which cannot be invested into directly. Past performance does not guarantee future results. 4 The FTSE Developed ex North America Index is an unmanaged index of large and mid-cap stocks providing coverage of developed markets, excluding the US and Canada. It cannot be invested into directly. Past performance does not guarantee future results. 5 New York Mercantile Exchange front-month contract; Prices can and do vary; past performance does not guarantee future results. 6 London Bullion Market Association; gold fixing pricing; Prices can and do vary; past performance does not guarantee future results. Copyright 2017 Financial Jumble, LLC All rights reserved. Content was provided by an independent third-party journalist. Index returns do not represent the performance of Hofer & Associates or any of its advisory clients. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the

5 incurrence of which would have the effect of decreasing historical performance results. There are no assurances that a portfolio will match or outperform any particular benchmark.