BULL MARKET FOR BONDS, STOCKS IN CORRECTION
By Gus Krafve
July 7th, 2010
June was another rough month for the stock market with the S&P 500 posting a decline of 5.23%. The economic data is coming in below expectations but continues to point to an expanding economy. Several companies will be reporting second quarter earnings results in the next few weeks. These earnings reports are coming at a critical time as the stock market is in the midst of its biggest correction since it began its recovery in March of 2009. The group of economists who have been calling for a double-dip recession has been growing and the information from the second quarter earnings releases will help provide clarity on where the economy in the second half of 2010 is heading. Below are the performance results for the first half of this year for the major market indices.
§ S&P 500 -6.65%
§ S&P MidCap -1.36%
§ S&P SmallCap 600 -0.88%
§ Dow § NASDAQ Comp. -7.05%
§ EAFE (Foreign Developed) -7.34%
§ Long-Term Treasuries +12.81%
§ Barclay’s High Yield Bonds +4.51%
§ Barclay’s Aggregate Bond +5.33%
§ Gold +13.68%
§ CRB Commodity Index -5.61%
§ U.S. Dollar Index +10.48%
While stocks have been struggling over the past couple months, the bond market has been performing very well. A new fixed income security called Qualified School Construction Bonds (QSCBs) is a part of the economic stimulus package that President Obama signed in February 2009. This program allows public school districts to save on interest costs associated with financing school improvement projects. The bond proceeds can be used to finance new construction, rehabilitation, repair of public school facilities, the acquisition of land and the acquisition of equipment to be used in such public school facilities. It is estimated this program will save public school districts roughly $10 billion over the next 10 years. In 2009, President Obama allocated $11 billion of face value, tax free, bonds to be issued in 2009 and 2010 to public school districts. Of this amount, 40% must be used for the top 100 largest educational agencies in the nation which is determined by the amount of Title 1 funds a school receives. Title 1 refers to the amount of government funding required for children below the poverty level. The remaining 60% is distributed between the remaining school districts in the state. Each state has a specific allocation of these funds which is set by the government and dependent upon population and need. The Federal government, not the school district, pays for the first 5.308% interest on $22 billion of bonds for up to 17 years, in the form of a tax credit. This subsidy is key and means many of the school districts issuing QSCB’s are paying little or no interest on the money they are borrowing.
