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Market Update


The last few months have seen some big changes in the bond market. At the end of August, the benchmark 10-year U.S. Treasury yield had risen more than 100 basis points from its May 1.66% low, with corporate, mortgage, and municipal bond yields following suit. This seems to have spooked mutual-fund investors, who yanked approximately $60 billion from bond funds in June, $11.7 billion in July, and $27.2 billion in August. (Source: Morningstar)

With bond yields now higher than they’ve been in several years and showing few signs of retreating, the question is: where do we go from here?


In our opinion the relative attractiveness of the bond market is currently less attractive than other areas of the market: Nevertheless, it remains an essential part of a well-diversified portfolio, helping to manage income and market volatility and drawdowns, particularly amid flights to more conservative investments. Thus, while we will recommend adjusting client portfolio exposure to favor  valuations at the expense of areas that look pricey to us, we will not abandon bonds altogether in our diversified portfolios.


We have recently updated two measures we use to try to predict the likelihood of another recession.  The Recession Index and Chicago Federal Reserve National Activity Index three month moving average (CFNAI-MA3) both of which are shown in the graphs below.



Source: St. Louis Federal Reserve Data Site (http://research.stlouisfed.org/fred2)


 
Source: Chicago Federal Reserve National Activity Index (http://www.chicagofed.org/webpages/research/data/cfnai/current_data.cfm)
History has shown that when the Recession Index is less than zero, the CFNAI-MA3 measurement is less than -0.70 and both are trending more negatively, that the economy is relatively sensitive to macro economic shocks.  However, this does NOT guarantee that a recession is at hand.  As the graphs above exhibit, however, the values of these metrics were  significantly negative during the last several recessions.  Based on our calculations the current Recession Index value as of 9/16/2013 is +19% and the CFNAI-MA3 is -0.18.  Please note, however, that past economic performance is no guarantee of future performance.
Diversification does not ensure a profit or guarantee against loss: it is a method used to help manage risk.




White House Financial & Settlement Consulting, LLC
Independent - Client-Focused - Financial Advice

114 South Main Street • Suite 300 • Chelsea, Michigan 48118 • Phone: (734) 433-1670 • Fax: (734) 433-1671

Securities offered through Sigma Financial Corporation. Member FINRA/SIPC

Fee-based investment advisory services offered through Sigma Planning Corporation, a registered investment advisor

White House Financial & Settlement Consulting, LLC is independent of  Sigma Financial Corp. and Sigma Planning Corp

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