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August 17, 2015 - Stocks Gain on Greek Deal & Data

| August 17, 2015
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Despite significant volatility, stocks ended last week higher after a finalized Greek bailout deal and some upbeat domestic economic data. For the week, the S&P 500 gained 0.67%, the Dow grew 0.60%, and the NASDAQ added 0.09%.[1]

Greece finally clinched a third bailout from creditors when its parliament approved the deal and Germany backed off its opposition to the terms. The deal isn't perfect and the International Monetary Fund is refusing to participate until there is an agreement on debt relief from Greece's Eurozone creditors.[2] However, U.S. investors greeted the news that Greece will remain in the monetary union with a sigh of relief. Is the Greek drama finally over? Probably not for long.

China added significant uncertainty last week when the Chinese government unexpectedly devalued the yuan against the dollar by the largest amount in two decades. While China claims that the move isn't designed to lower export prices and boost demand, the move came after a series of depressing export reports that suggest China's economy is in trouble. At any rate, China has been under immense pressure to devalue its currency as part of market reforms. Investors are worried that a currency war could put pressure on the dollar and hurt U.S. manufacturers.

Despite panicky media headlines that claimed that the sky is falling, the devaluation really isn't a big deal. Here's why:

The Chinese yuan dropped about 3.5% against the dollar in the past year. However, the Euro is down 16.4%, the Canadian dollar is down 15.8%, and the Japanese yen is down 17.0%.[3] All told, the U.S. dollar has gained significant ground against the currencies of most of our trading partners. A stronger U.S. dollar means that Americans can afford to buy more foreign products. As First Trust's chief economist says, "The idea that the Chinese devaluation is going to send ripples of catastrophe across the world is nothing more than a Chicken Little story."[4]

A cheaper yuan is like a sale on Chinese goods. Right now, the Chinese economy is showing weakness, and a cheaper currency will hopefully help stoke growth in the world's second-largest economy. If the move is successful in boosting growth, it will be a big help to the global economy. A more expensive dollar relative to the yuan means that Chinese consumers might end up importing fewer U.S. goods (potentially causing some U.S. firms to suffer in the short term). However, if it's a sign that China may be allowing the market (instead of its central bank) to set the value of its currency, it's a net win for global consumers in the long term.

Looking at the week ahead, all eyes will be on China to see whether last week's currency devaluation will continue. Analysts will also be digging through the official minutes from the latest Federal Reserve Open Market Committee meeting for more hints about how the Fed plans to handle potential threats to economic growth.[5]

P.S. You may have seen Chinese currency called the yuan or the renminbi in media reports and wondered if there was a difference. They are essentially interchangeable terms. Renminbi (meaning "people's currency" in Mandarin) is the formal term used by Chinese officials, while the yuan is the actual unit of the currency.

ECONOMIC CALENDAR:

Monday: Empire State Mfg. Survey, Housing Market Index, Treasury International Capital
Tuesday: Housing Starts
Wednesday: Consumer Price Index, EIA Petroleum Status Report, FOMC Minutes
Thursday: Jobless Claims, Philadelphia Fed Business Outlook Survey, Existing Home Sales
Friday: PMI Manufacturing Index Flash

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

HEADLINES:

Consumer sentiment flags in August. Though American consumers don't seem to be concerned about inflation or current economic conditions, the latest survey indicates some concerns about their future finances. Dips in consumer sentiment could translate into lower spending this quarter.[6]

Nationwide home rental prices are sky high. The cost of renting a home has risen to record highs. A study found that renters can now expect to pay about 30% of their income in rent, as compared to the 15% buyers pay toward a mortgage. Hopefully, unaffordable rents will contribute to housing market activity.[7]

Weekly jobless claims rise again. The number of Americans filing new claims for unemployment benefits rose unexpectedly last week. Though claims have risen for three straight weeks, they are still below the 300,000 mark and still support a strengthening job market.[8]

Business inventories rise. U.S. businesses increased their stockpiles of goods by the most in two years, indicating that they expect demand to increase in the coming months. Analysts hope that a stronger job market will boost consumer spending.[9]




These are the views of Platinum Advisor Marketing Strategies, LLC, and not necessarily those of the named representative, Broker dealer or Investment Advisor, and should not be construed as investment advice. Neither the named representative nor the named Broker dealer or Investment Advisor gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

Diversification does not guarantee profit nor is it guaranteed to protect assets.

The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896.

The Nasdaq Composite is an index of the common stocks and similar securities listed on the NASDAQ stock market and is considered a broad indicator of the performance of stocks of technology companies and growth companies.

The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indexes from Europe, Australia and Southeast Asia.

The Dow Jones Corporate Bond Index is a 96-bond index designed to represent the market performance, on a total-return basis, of investment-grade bonds issued by leading U.S. companies. Bonds are equally weighted by maturity cell, industry sector, and the overall index.

The S&P/Case-Shiller Home Price Indices are the leading measures of U.S. residential real estate prices, tracking changes in the value of residential real estate. The index is made up of measures of real estate prices in 20 cities and weighted to produce the index.

The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

Past performance does not guarantee future results.

You cannot invest directly in an index.

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Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.

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  1. https://finance.yahoo.com
    https://finance.yahoo.com
    https://finance.yahoo.com
  2. http://www.theguardian.com
  3. http://www.pgbank.com
  4. http://www.ftportfolios.com
  5. http://www.foxbusiness.com
  6. http://www.foxbusiness.com
  7. http://www.cnbc.com
  8. http://www.cnbc.com
  9. http://www.cnbc.com
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