The Markets
Despite a disappointing jobs report, stocks still managed to post a solid gain last week. In fact, all three major U.S. indexes --the Dow Jones Industrial Average, the S&P 500, and the NASDAQ Composite --ended last week in positive territory for the year, according to CNBC.
Strong corporate earnings are helping to keep a floor under the market. Roughly 75% of the companies that have reported second quarter earnings beat Wall Street estimates, according to CNBC. Of course, one factor that helped corporate America post strong earnings was keeping a tight rein on employment costs. Unfortunately, what’s good for corporate America may not always be good for “employment” America.
Bond yields continued to decline last week as the 2-year Treasury hit a record low of 0.50%. The 10-year Treasury yielded 2.82%, which is a 15-month low. Foreign country bonds are sporting low yields, too. The 10-year German Bund hit a record low yield of 2.51% last week, while the benchmark Japanese 10-year government bond yielded just 1.05% last week, according to Barron’s.
Low yields suggest either slower economic growth ahead or little to no inflation, or both, according to Barron’s. Low rates are generally good for businesses because it makes their cost of capital lower and makes it easier for them to reinvest for future growth. So far, the low rates appear to have helped stabilize the economy, but robust growth and reinvestment has yet to materialize, according to The New York Times.
Overall, the mixed economic data is helping keep the market stuck in a broad range.
“WE ARE IN A NEW NORMAL WORLD in which the distribution of outcomes is flatter and the tails are fatter,” according to a July 2010 Global Perspective report from Richard Clarida of PIMCO. What in the world does that mean?
Clarida’s words might sound like mumbo jumbo, but he actually makes a solid case that planning for “extreme” outcomes rather than “average” outcomes might be the appropriate investment strategy in the current climate.
History tells us that the average annualized total return on the S&P 500 between 1926 and 2009 was 9.9% and the standard deviation was 19.2, according to TD Ameritrade. Standard deviation is a measure of volatility and at 19. 2 (one standard deviation), it means that about 68% of the time, we would expect the S&P 500 annual return to be somewhere between a loss of 9.3% and a gain of 29.1%. At two standard deviations, it means that about 95% of the time, we would expect the S&P 500 to return somewhere between a loss of 28.5% and a gain of 48.3%. At three standard deviations, it means that about 99.7% of the time, we would expect the S&P 500 to return somewhere between a loss of 47.7% and gain of 67.5%.
Clarida is suggesting that, in the future, more of the returns in the financial markets will fall in the 2nd or 3rd standard deviation range (the “fat tail”) instead of the 1 standard deviation range (the “hump”). If true, this means we could expect more volatility -- both positive and negative -- in the future.
The future could be more volatile due to such things as the unpredictable nature of government regulation and bailouts, sovereign debt levels, high-frequency trading, geopolitical flare-ups, social unrest, high unemployment, and medical or scientific breakthroughs.
Recent events such as the May 6 “Flash Crash,” the 2008 financial crisis, the 2007-2009 bear market, and the 2008 spike and then collapse in oil prices, support Clarida’s idea that we live in volatile times.
So, if we are temporarily living in a “fat tail” world, then it makes sense to plan accordingly. And, that’s what we’re trying to do on your behalf.
Weekly Focus – Think About It
“Take calculated risks. That is quite different from being rash.”
-- General George S. Patton
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Monday, August 9, 2010
Monday, July 26, 2010
The Cornerstone Wealth Report 7/26/10
Weekly Commentary
July 26, 2010
The Markets
“The economy is still struggling; too many Americans are still out of work; and the Nation’s long-term fiscal trajectory is unsustainable, threatening future prosperity,” according to the Mid-Session Review submitted by the White House last week.
This supplemental update of the annual budget contained a number of projections that are of interest to us. Here are a few:
• A projected federal deficit of $2.9 trillion over the next two fiscal years.
• Gross Domestic Product projected to grow 3.2% this year, 3.6% in 2011, and 4.2% in 2012.
• Unemployment projected to average 9.7% this year, 9.0% in 2011, and 8.1% in 2012. It is projected to stay above 6% until 2015.
• The consumer price index projected to rise 1.6% this year, 1.3% next year, and 1.8% in 2012.
• The 10-year Treasury projected to yield on average 3.5% in 2010, 4.0% in 2011, and 4.6% in 2012.
Projections like this are, of course, notoriously difficult to get right. So much can happen in a short period and throw off the best laid plans. But, looking at the projections at least gives us a place to start. Overall, the projections are a mixed bag. The deficit numbers are problematic. The GDP growth projection is good if we can hit it. The unemployment numbers are painful. The inflation outlook is stable and the Treasury yield is favorable for business growth.
If, by the end of 2012, the above numbers come to fruition, then we would likely avoid a double-dip recession and the economy would probably “muddle along.” So far, corporate America is doing its part by showing really solid earnings for the second quarter. Companies such as Caterpillar, 3M, AT&T, and UPS notched solid quarters and suggest there is underlying strength in the economy, according to MarketWatch. In fact, of the 175 companies in the S&P 500 that have already reported their second quarter earnings, a whopping 78% have beaten analysts’ estimates while only 12% missed, according to data from Thomson Reuters as reported by MarketWatch. Buoyed by good earnings and relief over the European bank stress tests, the S&P 500 rose a solid 3.6% last week.
Given all the volatility we’ve had over the past 2½ years, “muddle along” might not be so bad!
WHETHER AN INVESTOR LEANS BULLISH OR BEARISH, there is ample data to support either view. This situation may explain why Fed Chairman Ben Bernanke told Congress last week that the economic outlook was “unusually uncertain.” For those investors who lean bullish, here are several supporting points courtesy of economist David Rosenberg as reported by Financial Times:
• Congress extended jobless benefits, which is one form of stimulus.
• Some Democrats are now in favor of delaying tax hikes.
• China is having some success slowing its property bubble without bursting it.
• Confidence is growing that the emerging markets may keep world growth positive even if more mature countries slow down.
• Eurozone debt and money markets have settled down after the problems with Greece sparked default fears.
• The European bank stress tests contained no major surprises and added clarity to the soundness of the banking system.
• Consumer credit delinquency rates in the U.S. are improving.
• Mortgage delinquencies in California, one of the hardest hit real estate markets, are at a three-year low.
• The BP oil spill is coming under control and is no longer each day’s top headline.
• The passage of the financial regulation bill removed one more cloud of uncertainty.
• Corporate America is reporting solid earnings for the second quarter and their future outlook has been, on balance, positive.
• Fed Chairman Ben Bernanke indicated he’ll keep using monetary policy to stimulate the economy and he’ll get even more aggressive if need be.
So, yes, there are reasons why the markets and the economy could do okay in the months to come. But, in this “unusually uncertain” time, it still makes sense to be “on guard.”
Weekly Focus – Think About It
“Even if I knew that tomorrow the world would go to pieces, I would still plant my apple tree.”
--Martin Luther King, Jr.
July 26, 2010
The Markets
“The economy is still struggling; too many Americans are still out of work; and the Nation’s long-term fiscal trajectory is unsustainable, threatening future prosperity,” according to the Mid-Session Review submitted by the White House last week.
This supplemental update of the annual budget contained a number of projections that are of interest to us. Here are a few:
• A projected federal deficit of $2.9 trillion over the next two fiscal years.
• Gross Domestic Product projected to grow 3.2% this year, 3.6% in 2011, and 4.2% in 2012.
• Unemployment projected to average 9.7% this year, 9.0% in 2011, and 8.1% in 2012. It is projected to stay above 6% until 2015.
• The consumer price index projected to rise 1.6% this year, 1.3% next year, and 1.8% in 2012.
• The 10-year Treasury projected to yield on average 3.5% in 2010, 4.0% in 2011, and 4.6% in 2012.
Projections like this are, of course, notoriously difficult to get right. So much can happen in a short period and throw off the best laid plans. But, looking at the projections at least gives us a place to start. Overall, the projections are a mixed bag. The deficit numbers are problematic. The GDP growth projection is good if we can hit it. The unemployment numbers are painful. The inflation outlook is stable and the Treasury yield is favorable for business growth.
If, by the end of 2012, the above numbers come to fruition, then we would likely avoid a double-dip recession and the economy would probably “muddle along.” So far, corporate America is doing its part by showing really solid earnings for the second quarter. Companies such as Caterpillar, 3M, AT&T, and UPS notched solid quarters and suggest there is underlying strength in the economy, according to MarketWatch. In fact, of the 175 companies in the S&P 500 that have already reported their second quarter earnings, a whopping 78% have beaten analysts’ estimates while only 12% missed, according to data from Thomson Reuters as reported by MarketWatch. Buoyed by good earnings and relief over the European bank stress tests, the S&P 500 rose a solid 3.6% last week.
Given all the volatility we’ve had over the past 2½ years, “muddle along” might not be so bad!
WHETHER AN INVESTOR LEANS BULLISH OR BEARISH, there is ample data to support either view. This situation may explain why Fed Chairman Ben Bernanke told Congress last week that the economic outlook was “unusually uncertain.” For those investors who lean bullish, here are several supporting points courtesy of economist David Rosenberg as reported by Financial Times:
• Congress extended jobless benefits, which is one form of stimulus.
• Some Democrats are now in favor of delaying tax hikes.
• China is having some success slowing its property bubble without bursting it.
• Confidence is growing that the emerging markets may keep world growth positive even if more mature countries slow down.
• Eurozone debt and money markets have settled down after the problems with Greece sparked default fears.
• The European bank stress tests contained no major surprises and added clarity to the soundness of the banking system.
• Consumer credit delinquency rates in the U.S. are improving.
• Mortgage delinquencies in California, one of the hardest hit real estate markets, are at a three-year low.
• The BP oil spill is coming under control and is no longer each day’s top headline.
• The passage of the financial regulation bill removed one more cloud of uncertainty.
• Corporate America is reporting solid earnings for the second quarter and their future outlook has been, on balance, positive.
• Fed Chairman Ben Bernanke indicated he’ll keep using monetary policy to stimulate the economy and he’ll get even more aggressive if need be.
So, yes, there are reasons why the markets and the economy could do okay in the months to come. But, in this “unusually uncertain” time, it still makes sense to be “on guard.”
Weekly Focus – Think About It
“Even if I knew that tomorrow the world would go to pieces, I would still plant my apple tree.”
--Martin Luther King, Jr.
Monday, July 19, 2010
The Cornerstone Wealth Report 7/19/10
The Markets
What is the most actively traded security on the planet?
The answer is the two-year Treasury note and its current yield is sending us a signal, according to Bloomberg, July 17. Last week, the yield on the two-year note fell for the seventh straight week and touched its lowest level ever. At just under 0.6%, it is now lower than during the peak of the financial crisis in the fall of 2008.
What does this signal?
In short, it suggests the economy is slowing down, inflation is not a threat, deflation is a possibility, and money-market rates will remain historically low, according to BusinessWeek, July 15, Barron’s, July17, and Bloomberg, July 17. Here’s a list of several economic reports released last week that help support this view:
· U.S. consumer sentiment tanked in early July, according to a survey by Reuters and the University of Michigan (MarketWatch, July 16).
· The consumer price index dropped for the third straight month in June, according to data from the Labor Department (Market Watch, July 16).
· Industrial production rose a modest 0.1% in June after having risen 1.2% in May, according to the Federal Reserve, July 15.
· Another report released by the Federal Reserve, June 22, said, “The economic outlook had softened somewhat and a number of members saw the risks to the outlook as having shifted to the downside.”
· The dollar has posted significant declines recently against the euro and yen as traders position themselves for a potential slowdown in the U.S. , according to Bloomberg, July 17.
While the data above points toward economic softness, second quarter corporate profits are coming in strong. Of the 48 companies in the S&P 500 index that have reported their earnings, 75% have topped analysts’ estimates, including a blow-out quarter from Intel, according to Reuters, July 16.
The tug-of-war between soft economic data and strong corporate profits is helping keep the market stuck in a bouncy trading range
HOW DO YOU SOLVE A PROBLEM LIKE JOBS?
This question has a double meaning--jobs as in employment and Jobs as in Steve Jobs of Apple.
Chronically high unemployment in the U.S. is having a debilitating effect on our economy. We can point to many causes for this, but one that receives lots of press is the outsourcing of jobs overseas--and that’s where Steve Jobs comes in.
Without getting into a political debate about the pros and cons of free trade, it turns out that in a little recognized fact, Apple is one of the biggest beneficiaries of outsourcing jobs overseas. We can’t get enough iPods, iPhones, iPads, and Macs, but relatively few of the jobs created by our insatiable demand are sprouting on our shores.
According to Apple and BusinessWeek, as of September 26, 2009, Apple had about 37,000full-time equivalent employees of which about 25,000 were based in the U.S. By contrast, Apple has subcontracted with a Chinese company called Foxconn that employs roughly 250,000 people who are devoted to building Apple products. Doing the math, for every one Apple employee working in the U.S. , there are 10 Foxconn employees building Apple products in China . Knowing that costs are much lower in China (and that Apple products are in high demand), is it any surprise that Apple earned $3 billion in profit with a 42% gross margin in the first three months of this year?
Again, this is not meant to start a political debate about free trade or protectionism as there are many facets to this issue. It simply points out the intractable nature of high unemployment in the U.S. , particularly in the manufacturing sector. Some people argue that free trade and capitalism are the best ways to grow jobs and profits. Others, notably former Intel chairman and chief executive officer Andrew Grove (Bloomberg, July 1), argue for protectionist measures to rebuild our domestic manufacturing base.
Ultimately, America needs to get its people back to work. The Apple example shows just how difficult that may be.
Weekly Focus – Think About It
“I want to put a ding in the universe.”
--Steve Jobs
Best regards,
Your Team at Cornerstone Wealth Management
What is the most actively traded security on the planet?
The answer is the two-year Treasury note and its current yield is sending us a signal, according to Bloomberg, July 17. Last week, the yield on the two-year note fell for the seventh straight week and touched its lowest level ever. At just under 0.6%, it is now lower than during the peak of the financial crisis in the fall of 2008.
What does this signal?
In short, it suggests the economy is slowing down, inflation is not a threat, deflation is a possibility, and money-market rates will remain historically low, according to BusinessWeek, July 15, Barron’s, July17, and Bloomberg, July 17. Here’s a list of several economic reports released last week that help support this view:
· U.S. consumer sentiment tanked in early July, according to a survey by Reuters and the University of Michigan (MarketWatch, July 16).
· The consumer price index dropped for the third straight month in June, according to data from the Labor Department (Market Watch, July 16).
· Industrial production rose a modest 0.1% in June after having risen 1.2% in May, according to the Federal Reserve, July 15.
· Another report released by the Federal Reserve, June 22, said, “The economic outlook had softened somewhat and a number of members saw the risks to the outlook as having shifted to the downside.”
· The dollar has posted significant declines recently against the euro and yen as traders position themselves for a potential slowdown in the U.S. , according to Bloomberg, July 17.
While the data above points toward economic softness, second quarter corporate profits are coming in strong. Of the 48 companies in the S&P 500 index that have reported their earnings, 75% have topped analysts’ estimates, including a blow-out quarter from Intel, according to Reuters, July 16.
The tug-of-war between soft economic data and strong corporate profits is helping keep the market stuck in a bouncy trading range
HOW DO YOU SOLVE A PROBLEM LIKE JOBS?
This question has a double meaning--jobs as in employment and Jobs as in Steve Jobs of Apple.
Chronically high unemployment in the U.S. is having a debilitating effect on our economy. We can point to many causes for this, but one that receives lots of press is the outsourcing of jobs overseas--and that’s where Steve Jobs comes in.
Without getting into a political debate about the pros and cons of free trade, it turns out that in a little recognized fact, Apple is one of the biggest beneficiaries of outsourcing jobs overseas. We can’t get enough iPods, iPhones, iPads, and Macs, but relatively few of the jobs created by our insatiable demand are sprouting on our shores.
According to Apple and BusinessWeek, as of September 26, 2009, Apple had about 37,000full-time equivalent employees of which about 25,000 were based in the U.S. By contrast, Apple has subcontracted with a Chinese company called Foxconn that employs roughly 250,000 people who are devoted to building Apple products. Doing the math, for every one Apple employee working in the U.S. , there are 10 Foxconn employees building Apple products in China . Knowing that costs are much lower in China (and that Apple products are in high demand), is it any surprise that Apple earned $3 billion in profit with a 42% gross margin in the first three months of this year?
Again, this is not meant to start a political debate about free trade or protectionism as there are many facets to this issue. It simply points out the intractable nature of high unemployment in the U.S. , particularly in the manufacturing sector. Some people argue that free trade and capitalism are the best ways to grow jobs and profits. Others, notably former Intel chairman and chief executive officer Andrew Grove (Bloomberg, July 1), argue for protectionist measures to rebuild our domestic manufacturing base.
Ultimately, America needs to get its people back to work. The Apple example shows just how difficult that may be.
Weekly Focus – Think About It
“I want to put a ding in the universe.”
--Steve Jobs
Best regards,
Your Team at Cornerstone Wealth Management
Monday, June 28, 2010
The Cornerstone Wealth Report 6/28/10
Can world governments "cut" their way to prosperity?
It's no secret that many countries are incurring large--and unsustainable--budget deficits. What's interesting is the approach each country is taking to try to lower their deficits to a manageable level. Britain, Japan, Germany, and Greece, for example, are focused on cutting government spending, according to Bloomberg, June 22. Conversely, the U.S., while concerned about government spending, seems more focused on keeping the stimulus spending alive and raising taxes until (hopefully) the economy can catch fire and grow on its own.
Who's right?
According to Harvard University professor Alberto Alesina, “There have been mountains of evidence in which cutting government spending has been associated with increases in growth, but people still don’t quite get it.” In addition, a study by Ben Broadbent and Kevin Daly of Goldman Sachs Group, Inc. as reported by Bloomberg on June 22, "discovered that reducing expenditures by 1 percentage point a year boosted average annual growth by 0.6 percentage point. Raising the ratio of taxes to GDP by the same margin cut growth by an average 0.9 percentage point." And, from a stock market perspective, the same report said, "The equity markets of the countries that sliced spending beat those of other advanced nations by 64% during a three-year period."
Like many things related to finance and economics, we won't know "who's right" until time passes and the market delivers its verdict. Between now and then, expect the vigorous debate on spending cuts versus stimulus spending to continue among academics, investors, and world leaders.
ARE THE FINANCIAL MARKETS "NORMALLY DISTRIBUTED" and should you even care? Consider this. The average height of an American male is 69.4 inches, according to the National Center for Health Statistics, October 22, 2008. If we randomly chose 1,000 American males and calculated their average height, we would likely come up with a number close to 69.4 inches. Now, in an un-random fashion, let's assume we found an 8-foot tall man--who is clearly an extreme outlier--and we have him join the previous group of 1,000. By recalculating the data, we now find the average height of this group of 1,001 men jumps by a very underwhelming 0.03 inches. In other words, adding an extremely tall outlier to this group of average height men had very little effect on the overall average height of the group. Without getting too technical and assuming "tall outliers" are just as likely to be found as "short outliers," we can say the height of men follows a "bell curve" or a normal distribution.
By contrast, let's consider the average net worth of American households. According to the Federal Reserve, February 2009, the average American family had a net worth of $556,300 in 2007. Like above, if we randomly chose 1,000 families, this group would probably have an average net worth near $556,300. However, for fun, let's add Warren Buffett--and his $40 billion net worth--to the group. Recalculating the data, we find the average net worth of this group of 1,001 Americans jumps to $40.5 million! Clearly, adding an extreme outlier to this sample dramatically changed the average of the sample.
As it relates to the financial markets, do you think their distribution of returns looks more like the average height of American men (where an extreme outlier doesn't really affect the average) or the average net worth of American households (where an extreme outlier could have an extreme impact)? If you think the returns in financial markets look like the average height of American men, but it turns out they behave more like the average net worth of American households, you could lose a lot of money. In fact, much of modern portfolio theory is based on the assumption that financial markets follow a normal distribution, i.e., they look like the average height of American men. Unfortunately, experience suggests otherwise.
Warren Buffett-type outliers such as the October 1987 stock market crash, the 2000-2002 bursting of the internet bubble, the 2007-2009 bear market, the 2008 credit crisis, and last month's "flash crash," suggest that the financial markets are subject to large outliers that can significantly affect your financial well-being. Knowing that, we do our best to try to limit the damage to your portfolio if one of these outliers occurs during your investing lifetime.
Weekly Focus – Think About It
"In the business world, the rearview mirror is always clearer than the windshield."
--Warren Buffett
Best regards,
Your Team at Cornerstone Wealth Management
It's no secret that many countries are incurring large--and unsustainable--budget deficits. What's interesting is the approach each country is taking to try to lower their deficits to a manageable level. Britain, Japan, Germany, and Greece, for example, are focused on cutting government spending, according to Bloomberg, June 22. Conversely, the U.S., while concerned about government spending, seems more focused on keeping the stimulus spending alive and raising taxes until (hopefully) the economy can catch fire and grow on its own.
Who's right?
According to Harvard University professor Alberto Alesina, “There have been mountains of evidence in which cutting government spending has been associated with increases in growth, but people still don’t quite get it.” In addition, a study by Ben Broadbent and Kevin Daly of Goldman Sachs Group, Inc. as reported by Bloomberg on June 22, "discovered that reducing expenditures by 1 percentage point a year boosted average annual growth by 0.6 percentage point. Raising the ratio of taxes to GDP by the same margin cut growth by an average 0.9 percentage point." And, from a stock market perspective, the same report said, "The equity markets of the countries that sliced spending beat those of other advanced nations by 64% during a three-year period."
Like many things related to finance and economics, we won't know "who's right" until time passes and the market delivers its verdict. Between now and then, expect the vigorous debate on spending cuts versus stimulus spending to continue among academics, investors, and world leaders.
ARE THE FINANCIAL MARKETS "NORMALLY DISTRIBUTED" and should you even care? Consider this. The average height of an American male is 69.4 inches, according to the National Center for Health Statistics, October 22, 2008. If we randomly chose 1,000 American males and calculated their average height, we would likely come up with a number close to 69.4 inches. Now, in an un-random fashion, let's assume we found an 8-foot tall man--who is clearly an extreme outlier--and we have him join the previous group of 1,000. By recalculating the data, we now find the average height of this group of 1,001 men jumps by a very underwhelming 0.03 inches. In other words, adding an extremely tall outlier to this group of average height men had very little effect on the overall average height of the group. Without getting too technical and assuming "tall outliers" are just as likely to be found as "short outliers," we can say the height of men follows a "bell curve" or a normal distribution.
By contrast, let's consider the average net worth of American households. According to the Federal Reserve, February 2009, the average American family had a net worth of $556,300 in 2007. Like above, if we randomly chose 1,000 families, this group would probably have an average net worth near $556,300. However, for fun, let's add Warren Buffett--and his $40 billion net worth--to the group. Recalculating the data, we find the average net worth of this group of 1,001 Americans jumps to $40.5 million! Clearly, adding an extreme outlier to this sample dramatically changed the average of the sample.
As it relates to the financial markets, do you think their distribution of returns looks more like the average height of American men (where an extreme outlier doesn't really affect the average) or the average net worth of American households (where an extreme outlier could have an extreme impact)? If you think the returns in financial markets look like the average height of American men, but it turns out they behave more like the average net worth of American households, you could lose a lot of money. In fact, much of modern portfolio theory is based on the assumption that financial markets follow a normal distribution, i.e., they look like the average height of American men. Unfortunately, experience suggests otherwise.
Warren Buffett-type outliers such as the October 1987 stock market crash, the 2000-2002 bursting of the internet bubble, the 2007-2009 bear market, the 2008 credit crisis, and last month's "flash crash," suggest that the financial markets are subject to large outliers that can significantly affect your financial well-being. Knowing that, we do our best to try to limit the damage to your portfolio if one of these outliers occurs during your investing lifetime.
Weekly Focus – Think About It
"In the business world, the rearview mirror is always clearer than the windshield."
--Warren Buffett
Best regards,
Your Team at Cornerstone Wealth Management
Monday, June 21, 2010
The Cornerstone Wealth Report 6/21/10
A hypothetical Doctor of Investments might say we are in an "EKG market."
We've experienced a series of headlines that have sent the market on a yo-yo ride since we dropped the New Year's ball in Times Square six months ago. Here are a few of the eye-raising events that have kept investors on an emotional rollercoaster:
The S&P 500 index rose 15.2% between February 8 and April 23, according to data from Yahoo! Finance. Unfortunately, investor sentiment quickly turned and the index declined 13.7% between April 23 and June 7, according to data from Yahoo! Finance.
On May 6, the "flash crash" sent the Dow Jones Industrial Average to an intra-day loss of nearly 1,000 points before making a massive recovery to end the day down "only" 348 points, according to Portfolio.com. At one point during the day, the Dow dropped 481 points in 6 minutes and then jumped 502 points just 10 minutes later.
An April 20 explosion on a drilling rig sent as much as 60,000 barrels of oil a day flowing into the Gulf of Mexico making it the worst oil spill in American history, according to The New York Times on June 18.
A sovereign debt crisis in Europe sent shivers through world markets and led the European Union to unveil a nearly $1 trillion loan package designed to backstop weak countries from defaulting, according to The Wall Street Journal on May 10.
Gold prices hit an all-time high of $1,258 per ounce on June 18, "fueled by sovereign risk in the euro zone, historically low interest rates, and concern over the stability of paper currencies," according to CNBC on June 18.
Pop quiz time. After all these headline-grabbing events, in percentage terms, how much do you think the S&P 500 index has gone up or down since the end of last year? Brace yourself. The index has risen a whopping 0.2% between December 31, 2009 and last Friday.
The up-down EKG between the bulls and the bears has, like the U.S. versus Slovenia in the World Cup, ended in a draw. However, unlike the U.S. versus Slovenia, we still have six months left in this year to see who wins the yearly "Investment Cup."
HELEN REDDY PROCLAIMED, "I am woman, hear me roar. In numbers too big to ignore," back in the early 1970s. Today, those words are coming true in education, the workplace, and on Wall Street.
In an article titled, "The End of Men" in the July/August 2010 issue of Atlantic Magazine, author Hanna Rosin reported some little known statistics about how far women have come in today's society. How many of these were you aware of?
As of earlier this year, women now outnumber men in the U.S. workforce for the first time ever.
Even though women outnumber men in the workforce, three-quarters of the jobs lost in this recession were lost by men.
Thirteen of the 15 job categories projected to grow the fastest over the next decade are staffed primarily by women.
Women now hold more than 50% of managerial and professional jobs, according to the Bureau of Labor Statistics.
According to Rosin, women now earn 60% of master’s degrees, about 60% of all bachelor's degrees, about half of all law and medical degrees, and 42% of all MBAs.
A 2008 study by researchers at Columbia Business School and the University of Maryland looked at the top 1,500 U.S. companies from 1992 to 2006 and discovered that firms that had women in top positions performed better.
The rising level of women's educational attainment and workplace prominence will have a profound impact on the business and investment spheres in the years to come. As part of our "find a trend and throw yourself in front of it" philosophy, we will continue to monitor this long-term trend and the ensuing investment implications.
Weekly Focus – Think About It
“I shut my eyes in order to see.”
--Paul Gauguin
Best regards,
Your Team at Cornerstone Wealth Management
P.S. Please feel free to forward this commentary to family, friends, or colleagues. If you would like us to add them to the list, please reply to this e-mail with their e-mail address and we will ask for their permission to be added.
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* The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices.
* 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.
* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.
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* Consult your financial professional before making any investment decision.
* To unsubscribe from the “The Cornerstone Wealth Management Report: please reply to this e-mail with “Unsubscribe” in the subject line, or write us at Tait@mycornerstonewealth.com.
We've experienced a series of headlines that have sent the market on a yo-yo ride since we dropped the New Year's ball in Times Square six months ago. Here are a few of the eye-raising events that have kept investors on an emotional rollercoaster:
The S&P 500 index rose 15.2% between February 8 and April 23, according to data from Yahoo! Finance. Unfortunately, investor sentiment quickly turned and the index declined 13.7% between April 23 and June 7, according to data from Yahoo! Finance.
On May 6, the "flash crash" sent the Dow Jones Industrial Average to an intra-day loss of nearly 1,000 points before making a massive recovery to end the day down "only" 348 points, according to Portfolio.com. At one point during the day, the Dow dropped 481 points in 6 minutes and then jumped 502 points just 10 minutes later.
An April 20 explosion on a drilling rig sent as much as 60,000 barrels of oil a day flowing into the Gulf of Mexico making it the worst oil spill in American history, according to The New York Times on June 18.
A sovereign debt crisis in Europe sent shivers through world markets and led the European Union to unveil a nearly $1 trillion loan package designed to backstop weak countries from defaulting, according to The Wall Street Journal on May 10.
Gold prices hit an all-time high of $1,258 per ounce on June 18, "fueled by sovereign risk in the euro zone, historically low interest rates, and concern over the stability of paper currencies," according to CNBC on June 18.
Pop quiz time. After all these headline-grabbing events, in percentage terms, how much do you think the S&P 500 index has gone up or down since the end of last year? Brace yourself. The index has risen a whopping 0.2% between December 31, 2009 and last Friday.
The up-down EKG between the bulls and the bears has, like the U.S. versus Slovenia in the World Cup, ended in a draw. However, unlike the U.S. versus Slovenia, we still have six months left in this year to see who wins the yearly "Investment Cup."
HELEN REDDY PROCLAIMED, "I am woman, hear me roar. In numbers too big to ignore," back in the early 1970s. Today, those words are coming true in education, the workplace, and on Wall Street.
In an article titled, "The End of Men" in the July/August 2010 issue of Atlantic Magazine, author Hanna Rosin reported some little known statistics about how far women have come in today's society. How many of these were you aware of?
As of earlier this year, women now outnumber men in the U.S. workforce for the first time ever.
Even though women outnumber men in the workforce, three-quarters of the jobs lost in this recession were lost by men.
Thirteen of the 15 job categories projected to grow the fastest over the next decade are staffed primarily by women.
Women now hold more than 50% of managerial and professional jobs, according to the Bureau of Labor Statistics.
According to Rosin, women now earn 60% of master’s degrees, about 60% of all bachelor's degrees, about half of all law and medical degrees, and 42% of all MBAs.
A 2008 study by researchers at Columbia Business School and the University of Maryland looked at the top 1,500 U.S. companies from 1992 to 2006 and discovered that firms that had women in top positions performed better.
The rising level of women's educational attainment and workplace prominence will have a profound impact on the business and investment spheres in the years to come. As part of our "find a trend and throw yourself in front of it" philosophy, we will continue to monitor this long-term trend and the ensuing investment implications.
Weekly Focus – Think About It
“I shut my eyes in order to see.”
--Paul Gauguin
Best regards,
Your Team at Cornerstone Wealth Management
P.S. Please feel free to forward this commentary to family, friends, or colleagues. If you would like us to add them to the list, please reply to this e-mail with their e-mail address and we will ask for their permission to be added.
Securities offered through LPL Financial, Member FINRA/SIPC.
* 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 DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices.
* 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.
* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.
* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* 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.
* Consult your financial professional before making any investment decision.
* To unsubscribe from the “The Cornerstone Wealth Management Report: please reply to this e-mail with “Unsubscribe” in the subject line, or write us at Tait@mycornerstonewealth.com.
Wednesday, June 16, 2010
The Cornerstone Wealth Report 6/14/10
Which country is the most attractive market for investors?
Perhaps Brazil? Russia? India? China? Collectively, those four are known as the "BRIC" countries and for a number of years, many investors have pointed to them as economic stars. However, in a global quarterly poll of investors and analysts who are Bloomberg subscribers released on June 8, "Almost four of 10 respondents picked the U.S. as the market presenting the best opportunities in the year ahead." That placed the U.S. #1 on the list followed by Brazil, China, and India.
Of course, this is simply the opinion of a group of investors and analysts and it does not mean that the U.S. will turn out to be the best market. But, it does raise an interesting observation, which is… there are countries with good economics and countries with good investment opportunities--and they are not always the same.
Here's what we mean. In the first quarter of 2010, Brazil, India, and China's economies expanded at an annual rate of 9.0%, 8.6%, and 11.9%, respectively, as measured by gross domestic product, according to Bloomberg. That's huge. By contrast, the U.S. economy expanded at a relatively modest 3.0% in the first quarter, according to the Bureau of Economic Analysis. On the surface, you might think that the three countries with the highest economic growth rates would also present the most attractive investment opportunities. Possibly yes, but the latest survey from Bloomberg put the good ol' USA in the #1 spot.
Why would these investors and analysts put a slower-growing U.S. ahead of fast-growing Brazil, India, and China? There could be numerous reasons, but a simple takeaway is this--in the short-term, good economics does not always translate into good investment opportunities. For example, if the fast economic growth in Brazil, India, and China was already "priced into" their financial markets, then the near-term outlook for stock prices might be muted. Conversely, if the modest growth in the U.S. helped drive our stock prices down to a relatively low level, then we might be in the best position to experience a bounce from this "oversold" condition.
This is a long-winded way of saying short-term market movements might not reflect current economic realities.
DID YOU FEEL WEALTHIER in the first 3 months of this year? Well, believe it or not, the net worth of U.S. households rose by $1.1 trillion in the first quarter, according to the Federal Reserve. Most of this increase came from rising stock prices. And, if you believe economists, each extra dollar of wealth should generate about 5 cents of spending over time, according to MarketWatch. Dubbed "The Wealth Effect," it suggests that rising stock prices could lead to a virtuous cycle of higher spending, higher corporate earnings, and higher stock prices. That's the good news.
Here's the bad news. The theory also works in reverse.
Yes, household net worth was up in the first quarter, but it is still down about $11.4 trillion from its early 2007 peak, according to MarketWatch. And, with the roughly 7% slide we've seen in S&P 500 so far in the second quarter, we may see the net worth number drop when the second quarter data is released in a few months.
This net worth data and the stretched balance sheets of many Americans leaves us with a conundrum. On one hand, consumer spending accounts for about 70% of U.S. economic activity, according to Associated Press. So, if we want robust economic growth, we need consumers to open their wallets and start buying stuff. On the other hand, the pragmatic observer says consumers are already too much in debt and need to curb their spending and build up their savings. This could lead to slower growth.
Essentially, we can keep spending by going deeper in debt and hope we can "leverage" our way to prosperity. Or, we can cut our spending, increase our savings, and gradually build our way back to a sustainable growth rate. Both scenarios would likely cause some pain. The former scenario would likely delay the pain. The latter scenario would likely speed it up.
Sooner or later, don't be surprised if we enter an "Age of Austerity" that enables (forces?) consumers to reduce their debts, and, after a painful adjustment, puts our country back on a path to prosperity.
Weekly Focus – Think About It
"I have learned, as a rule of thumb, never to ask whether you can do something. Say, instead, that you are doing it. Then fasten your seat belt. The most remarkable things follow."
--Julia Cameron
Best regards,
Tait
Securities offered through LPL Financial, Member FINRA/SIPC.
* 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 DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices.
* 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.
* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.
* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* 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.
* Consult your financial professional before making any investment decision
Perhaps Brazil? Russia? India? China? Collectively, those four are known as the "BRIC" countries and for a number of years, many investors have pointed to them as economic stars. However, in a global quarterly poll of investors and analysts who are Bloomberg subscribers released on June 8, "Almost four of 10 respondents picked the U.S. as the market presenting the best opportunities in the year ahead." That placed the U.S. #1 on the list followed by Brazil, China, and India.
Of course, this is simply the opinion of a group of investors and analysts and it does not mean that the U.S. will turn out to be the best market. But, it does raise an interesting observation, which is… there are countries with good economics and countries with good investment opportunities--and they are not always the same.
Here's what we mean. In the first quarter of 2010, Brazil, India, and China's economies expanded at an annual rate of 9.0%, 8.6%, and 11.9%, respectively, as measured by gross domestic product, according to Bloomberg. That's huge. By contrast, the U.S. economy expanded at a relatively modest 3.0% in the first quarter, according to the Bureau of Economic Analysis. On the surface, you might think that the three countries with the highest economic growth rates would also present the most attractive investment opportunities. Possibly yes, but the latest survey from Bloomberg put the good ol' USA in the #1 spot.
Why would these investors and analysts put a slower-growing U.S. ahead of fast-growing Brazil, India, and China? There could be numerous reasons, but a simple takeaway is this--in the short-term, good economics does not always translate into good investment opportunities. For example, if the fast economic growth in Brazil, India, and China was already "priced into" their financial markets, then the near-term outlook for stock prices might be muted. Conversely, if the modest growth in the U.S. helped drive our stock prices down to a relatively low level, then we might be in the best position to experience a bounce from this "oversold" condition.
This is a long-winded way of saying short-term market movements might not reflect current economic realities.
DID YOU FEEL WEALTHIER in the first 3 months of this year? Well, believe it or not, the net worth of U.S. households rose by $1.1 trillion in the first quarter, according to the Federal Reserve. Most of this increase came from rising stock prices. And, if you believe economists, each extra dollar of wealth should generate about 5 cents of spending over time, according to MarketWatch. Dubbed "The Wealth Effect," it suggests that rising stock prices could lead to a virtuous cycle of higher spending, higher corporate earnings, and higher stock prices. That's the good news.
Here's the bad news. The theory also works in reverse.
Yes, household net worth was up in the first quarter, but it is still down about $11.4 trillion from its early 2007 peak, according to MarketWatch. And, with the roughly 7% slide we've seen in S&P 500 so far in the second quarter, we may see the net worth number drop when the second quarter data is released in a few months.
This net worth data and the stretched balance sheets of many Americans leaves us with a conundrum. On one hand, consumer spending accounts for about 70% of U.S. economic activity, according to Associated Press. So, if we want robust economic growth, we need consumers to open their wallets and start buying stuff. On the other hand, the pragmatic observer says consumers are already too much in debt and need to curb their spending and build up their savings. This could lead to slower growth.
Essentially, we can keep spending by going deeper in debt and hope we can "leverage" our way to prosperity. Or, we can cut our spending, increase our savings, and gradually build our way back to a sustainable growth rate. Both scenarios would likely cause some pain. The former scenario would likely delay the pain. The latter scenario would likely speed it up.
Sooner or later, don't be surprised if we enter an "Age of Austerity" that enables (forces?) consumers to reduce their debts, and, after a painful adjustment, puts our country back on a path to prosperity.
Weekly Focus – Think About It
"I have learned, as a rule of thumb, never to ask whether you can do something. Say, instead, that you are doing it. Then fasten your seat belt. The most remarkable things follow."
--Julia Cameron
Best regards,
Tait
Securities offered through LPL Financial, Member FINRA/SIPC.
* 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 DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices.
* 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.
* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.
* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* 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.
* Consult your financial professional before making any investment decision
Tuesday, June 8, 2010
Weekly Commentary June 7, 2010
Despite the blaring headlines of late, the U.S. stock market has been stuck in a broad trading range since last September.
It's easy to get caught up in the daily gyrations of the stock market's ups and downs, but when viewed through a longer-term lens, the S&P 500 index has been pinballing between a range of about 1,040 and 1,217. The low end of the range was established in mid-September of last year and the high end of the range was reached in late April of this year, according to data from Yahoo! Finance. Last Friday, the index closed at 1,065, which is near the low end of the range.
Range-bound markets are not unusual and with the big rise we've had since March 2009, some consolidation of those gains is par for the course. Going forward, the market can do one of three things. It can continue to bounce around the range, it can breakout of the range to the upside, or it can breakdown. Of course, nobody knows until after the fact which scenario will occur, but regardless of the next direction, we continue to do all we can to help you reach your goals and objectives.
Data as of 6/4/10 1-Week Y-T-D 1-Year 3-Year 5-Year 10-Year
Standard & Poor's 500 (Domestic Stocks) -2.3% -4.5% 13.3% -11.6% -2.3% -3.2%
DJ Global ex US (Foreign Stocks) -1.2 -11.2 6.7 -12.9 1.4 -0.1
10-year Treasury Note (Yield Only) 3.2 N/A 3.7 4.9 4.0 6.1
Gold (per ounce) -0.3 9.0 24.0 21.5 23.1 15.6
DJ-UBS Commodity Index -2.7 -12.3 -4.7 -11.4 -4.7 1.6
DJ Equity All REIT TR Index -6.0 4.3 38.7 -12.1 0.8 10.3
Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable or not available.
HOW OFTEN SHOULD WE EXPECT THE STOCK MARKET to experience declines of at least 5%? When training for athletic events coaches are fond of saying, "No pain, no gain." Likewise, investors should expect to endure the "pain" of market declines in order to benefit from the "gain" of bull markets. But, in order to withstand these market declines, it's helpful to know how much pain is "normal."
The chart below shows more than 100 years of the frequency of various declines in the Dow Jones Industrial Average. Although past performance is no guarantee of future results, the chart should give you some historical perspective:
A History of Declines (1900 - December 2009)
Type of Decline Average Frequency(1) Average Length(2)
- 5% or more About 3 times a year 48 days
- 10% or more About once a year 115 days
- 15% or more About once every 2 years 217 days
- 20% or more About once every 3 1/2 years 338 days
Source: Capital Research and Management Company
(1) Assumes 50% recovery rate
(2) Measures market high to market low
As of last week, the Dow was in the "-10% or more" category, according to CNNMoney.com. This was the first decline of 10% or more since March 2009, according to Barron's. Looking at the chart above, the current decline puts us right in line with the historical frequency of such declines.
We realize that market declines are not enjoyable even if they are in line with historical frequency. However, knowing where we stand within the context of history can help us make clearer and less emotional decisions as it relates to investment strategy.
Weekly Focus – Think About It
"The trend is your friend except at the end where it bends."
--Ed Seykota
Best regards,
Tait Lane
P.S. Please feel free to forward this commentary to family, friends, or colleagues. If you would like us to add them to the list, please reply to this e-mail with their e-mail address and we will ask for their permission to be added.
Securities offered through LPL Financial, Member FINRA/SIPC.
* 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 DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices.
* 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.
* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.
* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* 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.
* Consult your financial professional before making any investment decision.
It's easy to get caught up in the daily gyrations of the stock market's ups and downs, but when viewed through a longer-term lens, the S&P 500 index has been pinballing between a range of about 1,040 and 1,217. The low end of the range was established in mid-September of last year and the high end of the range was reached in late April of this year, according to data from Yahoo! Finance. Last Friday, the index closed at 1,065, which is near the low end of the range.
Range-bound markets are not unusual and with the big rise we've had since March 2009, some consolidation of those gains is par for the course. Going forward, the market can do one of three things. It can continue to bounce around the range, it can breakout of the range to the upside, or it can breakdown. Of course, nobody knows until after the fact which scenario will occur, but regardless of the next direction, we continue to do all we can to help you reach your goals and objectives.
Data as of 6/4/10 1-Week Y-T-D 1-Year 3-Year 5-Year 10-Year
Standard & Poor's 500 (Domestic Stocks) -2.3% -4.5% 13.3% -11.6% -2.3% -3.2%
DJ Global ex US (Foreign Stocks) -1.2 -11.2 6.7 -12.9 1.4 -0.1
10-year Treasury Note (Yield Only) 3.2 N/A 3.7 4.9 4.0 6.1
Gold (per ounce) -0.3 9.0 24.0 21.5 23.1 15.6
DJ-UBS Commodity Index -2.7 -12.3 -4.7 -11.4 -4.7 1.6
DJ Equity All REIT TR Index -6.0 4.3 38.7 -12.1 0.8 10.3
Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable or not available.
HOW OFTEN SHOULD WE EXPECT THE STOCK MARKET to experience declines of at least 5%? When training for athletic events coaches are fond of saying, "No pain, no gain." Likewise, investors should expect to endure the "pain" of market declines in order to benefit from the "gain" of bull markets. But, in order to withstand these market declines, it's helpful to know how much pain is "normal."
The chart below shows more than 100 years of the frequency of various declines in the Dow Jones Industrial Average. Although past performance is no guarantee of future results, the chart should give you some historical perspective:
A History of Declines (1900 - December 2009)
Type of Decline Average Frequency(1) Average Length(2)
- 5% or more About 3 times a year 48 days
- 10% or more About once a year 115 days
- 15% or more About once every 2 years 217 days
- 20% or more About once every 3 1/2 years 338 days
Source: Capital Research and Management Company
(1) Assumes 50% recovery rate
(2) Measures market high to market low
As of last week, the Dow was in the "-10% or more" category, according to CNNMoney.com. This was the first decline of 10% or more since March 2009, according to Barron's. Looking at the chart above, the current decline puts us right in line with the historical frequency of such declines.
We realize that market declines are not enjoyable even if they are in line with historical frequency. However, knowing where we stand within the context of history can help us make clearer and less emotional decisions as it relates to investment strategy.
Weekly Focus – Think About It
"The trend is your friend except at the end where it bends."
--Ed Seykota
Best regards,
Tait Lane
P.S. Please feel free to forward this commentary to family, friends, or colleagues. If you would like us to add them to the list, please reply to this e-mail with their e-mail address and we will ask for their permission to be added.
Securities offered through LPL Financial, Member FINRA/SIPC.
* 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 DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices.
* 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.
* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.
* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* 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.
* Consult your financial professional before making any investment decision.
Friday, May 7, 2010
Market Pullback – Not a Financial Crisis
On Thursday, May 6, 2010, the stock market, as measured by the S&P 500, expanded its recent pullback with a vengeance as it dropped over 3% for the day after rallying from midday declines of almost 10%. While fear was certainly the undertone for the day, the big declines and subsequent rally happened all within an hour. Although the point damage was largely mitigated, uncertainty and concern remain entrenched in the market.
While the catalyst for the large decline was attributed to an apparent trading error that triggered a technical selloff, it was the uncertain environment regarding the fiscal crisis of several countries in Southern Europe that has created the negative backdrop for the market. Concern over the bailout of Greece has been widely reported, but the emerging anxiety of the market is the potential contagion of Greece’s fiscal deficit issues to other European countries and perhaps beyond. The very real concern is if Europe will once again teeter back into the realm of recession, which could have negative impacts to the export portion of U.S. multi-national companies, certainly has the equity markets nervous.
While the fiscal crisis of Greece and other Southern European countries creates market uncertainty, it is important to remember that the events are the after-effects of the 2008 financial crisis and not the start of a new financial crisis. Greece is not alone—it is one of many companies, families, individuals and now even countries that have been causalities of the recent recession. Whether it was a job loss, a home foreclosure, rising debt, the need to cut back on spending or a national fiscal crisis as it is for Greece, there have been many negative consequences resulting from the most severe recession in almost 80 years. That said, these negative events are the effects of the financial crisis we have just been through and not the cause of another new wave of credit concerns and another financial market collapse.
While fear is always an unwelcomed emotion, in investing fear may create opportunity. Since the recovery began back in early March 2009, the S&P 500 has risen approximately 70%, but not in a straight line. In fact, along the ascent, there have been four pullbacks ranging from 5% to 10%, including this most recent market selloff. I would argue that the selloff is not the result of increasing bad news, but rather the market became priced for perfection and perfection was unrealistic. After huge market gains over the last year, expectations grew greater and greater. The bar continued to be raised until the point where, regardless of how strong the economic backdrop was, expectations were greater than reality. The result was a reset in expectations and a pullback in the market. Greece happened to be the catalyst, but the trigger could have been any report or event that did not meet the market’s expectations of near perfection. The fact remains that pullbacks, like the one we are currently in the midst of, are healthy as they serve to reset expectations and re-engage nervous, profit-taking bulls back into a recovery.
When wondering how to react to times like these from an investment perspective, let’s not forget the fact that the market plunged on what appears to be a trading error and then corrected itself all within an hour. This indicates a market demonstrating stability, not in a freefall. This does not mean we will not get pullbacks and market hiccups like we are experiencing now, as these are both needed to establish a balance between buyers and sellers and to support future, healthy market advances.
Sometimes in periods of fear, investors and the market itself can lose the forest through the trees. While the fiscal problem in Greece, the Goldman Sachs testimony discussions with Congress, and concerns arising from a global tightening of monetary policy have stolen much of the headlines as of late, a full view of the “forest” would show that the overall economy continues to improve. One piece of evidence was released today (May 7, 2010) in the April 2010 employment report. The U.S. economy lost a total of 8.4 million jobs since the start of the recession highlighted by 22 consecutive months of job losses, but we have added jobs in 5 of the last 6 months to the tune of 528,000 new jobs. In the end, the economic backdrop is on the mend.
The bottom line is that there is a big difference between a pullback and a financial crisis. And there is an even bigger difference between how the market reacts to events that cause a crisis (Bear Stearns, Lehman Brothers, and the credit crisis of 2008) and those events that are the aftershocks of a severe recession, like the situation unfolding in Greece and Southern Europe. There is also a difference between the two definitions of risk: danger and opportunity. We would argue that the latter is far more likely than the former at these levels in the market and at this stage of the market recovery.
With a little patience, the commitment to a well thought out investment plan and a willingness to follow Warren Buffet’s sage advice to “be greedy when others are fearful and fearful when others are greedy” could result in turning the tone of this market pullback from danger to opportunity. The selloff we are experiencing, which is the fourth one since the market bottom of March 2009, serves as a reset of market expectations. It could provide the next springboard for the market to rally to higher levels over the coming months before running into the growing headwinds of rising rates, contested mid-term elections, and tougher year-over-year earnings comparisons for companies later in the year. For now, the market is in the midst of a good, old-fashioned pullback and this is not the start of a financial crisis. As such, we feel that the mending economic backdrop supports cautious opportunistic investing at these levels in the markets. As always, if you have questions, I encourage you to contact me.
Best regards,
Tait Lane
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
This research material has been prepared by LPL Financial. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
While the catalyst for the large decline was attributed to an apparent trading error that triggered a technical selloff, it was the uncertain environment regarding the fiscal crisis of several countries in Southern Europe that has created the negative backdrop for the market. Concern over the bailout of Greece has been widely reported, but the emerging anxiety of the market is the potential contagion of Greece’s fiscal deficit issues to other European countries and perhaps beyond. The very real concern is if Europe will once again teeter back into the realm of recession, which could have negative impacts to the export portion of U.S. multi-national companies, certainly has the equity markets nervous.
While the fiscal crisis of Greece and other Southern European countries creates market uncertainty, it is important to remember that the events are the after-effects of the 2008 financial crisis and not the start of a new financial crisis. Greece is not alone—it is one of many companies, families, individuals and now even countries that have been causalities of the recent recession. Whether it was a job loss, a home foreclosure, rising debt, the need to cut back on spending or a national fiscal crisis as it is for Greece, there have been many negative consequences resulting from the most severe recession in almost 80 years. That said, these negative events are the effects of the financial crisis we have just been through and not the cause of another new wave of credit concerns and another financial market collapse.
While fear is always an unwelcomed emotion, in investing fear may create opportunity. Since the recovery began back in early March 2009, the S&P 500 has risen approximately 70%, but not in a straight line. In fact, along the ascent, there have been four pullbacks ranging from 5% to 10%, including this most recent market selloff. I would argue that the selloff is not the result of increasing bad news, but rather the market became priced for perfection and perfection was unrealistic. After huge market gains over the last year, expectations grew greater and greater. The bar continued to be raised until the point where, regardless of how strong the economic backdrop was, expectations were greater than reality. The result was a reset in expectations and a pullback in the market. Greece happened to be the catalyst, but the trigger could have been any report or event that did not meet the market’s expectations of near perfection. The fact remains that pullbacks, like the one we are currently in the midst of, are healthy as they serve to reset expectations and re-engage nervous, profit-taking bulls back into a recovery.
When wondering how to react to times like these from an investment perspective, let’s not forget the fact that the market plunged on what appears to be a trading error and then corrected itself all within an hour. This indicates a market demonstrating stability, not in a freefall. This does not mean we will not get pullbacks and market hiccups like we are experiencing now, as these are both needed to establish a balance between buyers and sellers and to support future, healthy market advances.
Sometimes in periods of fear, investors and the market itself can lose the forest through the trees. While the fiscal problem in Greece, the Goldman Sachs testimony discussions with Congress, and concerns arising from a global tightening of monetary policy have stolen much of the headlines as of late, a full view of the “forest” would show that the overall economy continues to improve. One piece of evidence was released today (May 7, 2010) in the April 2010 employment report. The U.S. economy lost a total of 8.4 million jobs since the start of the recession highlighted by 22 consecutive months of job losses, but we have added jobs in 5 of the last 6 months to the tune of 528,000 new jobs. In the end, the economic backdrop is on the mend.
The bottom line is that there is a big difference between a pullback and a financial crisis. And there is an even bigger difference between how the market reacts to events that cause a crisis (Bear Stearns, Lehman Brothers, and the credit crisis of 2008) and those events that are the aftershocks of a severe recession, like the situation unfolding in Greece and Southern Europe. There is also a difference between the two definitions of risk: danger and opportunity. We would argue that the latter is far more likely than the former at these levels in the market and at this stage of the market recovery.
With a little patience, the commitment to a well thought out investment plan and a willingness to follow Warren Buffet’s sage advice to “be greedy when others are fearful and fearful when others are greedy” could result in turning the tone of this market pullback from danger to opportunity. The selloff we are experiencing, which is the fourth one since the market bottom of March 2009, serves as a reset of market expectations. It could provide the next springboard for the market to rally to higher levels over the coming months before running into the growing headwinds of rising rates, contested mid-term elections, and tougher year-over-year earnings comparisons for companies later in the year. For now, the market is in the midst of a good, old-fashioned pullback and this is not the start of a financial crisis. As such, we feel that the mending economic backdrop supports cautious opportunistic investing at these levels in the markets. As always, if you have questions, I encourage you to contact me.
Best regards,
Tait Lane
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
This research material has been prepared by LPL Financial. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
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