Psychologists at the University of Scranton have found that by the end of January one-third of people had broken their New Year’s resolution and by March that rises to about half. The failure rate goes up from there.
Many of us make New Year’s resolutions such as eating healthier or losing weight. These resolutions are easy to make but difficult to keep. Why? They are too broad. We hope to eat healthier, but we haven’t thought about how to overcome afternoon snacking. We hope to lose weight, but we have no specific plan for taking the pounds off. Focusing on the small steps — such as losing two pounds a month — is more realistic and helps us build more momentum toward our goal.
In 2012, investors’ New Year’s resolution may have been to buy stocks. After many years of selling stocks, investors appeared to take a break from this pattern this January. They began buying U.S. stock mutual funds, according to Investment Company Institute data. In two of the past three years, investors were net sellers of U.S. stock funds in February after resolving to buy them in January. It will be interesting to see if the decision to buy stocks begins to fade — like most resolutions — as February matures.
However, I do see reasons investors may continue to buy stocks, starting with the steady steps toward a healthier economy demonstrated in recent weeks. The January employment report shows the economy expanding: the jobless rate has dropped to 8.3%, and 243,000 new jobs were created last month — one more sign that the U.S. is not heading toward a recession. Policy makers and government leaders are also taking steps toward supporting a healthier economy. European leaders are continuing to work toward resolving the sovereign debt problems, building on the work done in 2011. Closer to home, the Federal Reserve has announced that it expects to keep interest rates on hold through at least 2014.
I am encouraged by these signs. LPL Financial Research is sticking by its outlook for 8-12%* gains for the stock market. While we may be due for a modest “February fallback” in the stock market, even after January’s strong start we probably have not yet seen the highs for the year. All segments of the bond market have responded well to this bond-friendly environment, with high-quality corporate bonds outperforming Treasuries, based on Barclays Index data.
Volatility may soon return to the markets, testing resolutions. However, I would use any pullback as an opportunity to consider buying in what is likely to be a fourth year in a row of gains for the stock market, based on our analysis. Ultimately what matters is not the big resolution, but the small steps we take to reach a goal. With this in mind, now is the time to stay focused on your resolutions, while others may lose discipline. And now is the time to take small steps toward your longer-term investment goals.
As always, if you have questions, I encourage you to contact me.
____________________________________________________________________________
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 me 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.
*LPL Financial Research provided this range based on our earning per share growth estimate for 2012, and a modest expansion in the price-to-earnings ratio.
The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Stock investing involves risk including the risk of loss.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise and bonds are subject to availability and change in price.
Treasuries: A marketable, fixed-interest U.S. government debt security. Treasury bonds make interest payments semi-annually and the income that holders receive is only taxed at the federal level.
The Federal Reserve is the central bank of the United States. Its unique structure includes a federal government agency, the Board of Governors, in Washington, D.C., and 12 regional Reserve Banks (Atlanta, Boston, Chicago, Cleveland, Dallas, Kansas city, Minneapolis, New York, Philadelphia, Richmond, San Francisco, and St. Louis).
The University of Scranton study was performed in 2002.
Our mission is to be dedicated to enhancing the quality of our clients' lives as we address their wealth to help them achieve their long-term goals and dreams. With our unmatched, quality service and guidance, we build strong relationships as we help simplify our clients' financial affairs, allowing them to focus on those areas that give their life meaning and purpose
Wednesday, February 29, 2012
Monday, February 27, 2012
Weekly Commentary February 27th, 2012
The Markets
It’s been rather calm in the stock market lately.
For the past couple years, the euro zone debt problems and the “will we or won’t we relapse into a recession” worry have been on center stage. Now, Europe’s immediate liquidity issue has been patched and the U.S. economy seems to be on firmer footing. Accordingly, the stock market has responded to these developments and, last week, the S&P 500 index closed at its highest level in more than 3½ years, according to The New York Times.
Fear has declined, too. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, ended last week at about 17. That’s down from 48 reached last August and well below the 22-year average of 20.6, according to CNBC and Bloomberg. A low VIX suggests investors are less fearful of near-term market volatility.
Are there any worries on the horizon that could upset this calm?
Oil prices are one thing to keep an eye on. They rose 6 percent last week and closed at nearly $110 per barrel. Geopolitical tensions in the Middle East contributed to the rise as Iran is reportedly within sight of creating a nuclear bomb. That, of course, creates major headaches not only for the Middle East, but for the world in general.
On top of that, “There's also an oil pipeline dispute between Sudan and South Sudan in northeastern Africa; unrest in Syria, Yemen, and Nigeria; varying levels of tribal infighting in Iraq and Libya; and the possibility of leadership issues in Venezuela, where the president is undergoing his third surgery for an undisclosed type of cancer,” according to The Milwaukee Journal Sentinel.
So far, the stock market hasn’t flinched in the face of these flashpoints. However, an unexpected turn for the worse in any of these areas could trip the markets. And, since the S&P 500 index has more than doubled in value since the March 9, 2009 low, according to The New York Times, it might not take much to trigger a market correction.
As a financial advisor, we know that there is always something to worry about. Frankly, it’s our job to worry about what could go wrong so you don’t have to. The good news is, as a country we always seem to find a way to overcome whatever obstacle is thrown our way.
INVESTORS TEND TO GET CAUGHT UP IN THE DAY-TO-DAY NOISE of the financial markets even though the markets often move in long secular cycles that can last more than a decade. For example, let’s look at interest rates.
At the end of 1964, the 10-year U.S. Treasury note yielded 4.2 percent. Over the following nearly 17 years, the yield rose until it peaked at 15.8 percent in September 1981, according to Bloomberg. During that span, the yield fluctuated significantly (the noise), but the long-term secular trend was a rising interest rate environment.
Since that peak in September 1981, the yield on the 10-year Treasury has been in a more than 30-year long-term secular decline. In fact, the yield was a slim 2.0 percent last week – well below 1964’s 4.2 percent. This decline was interrupted by numerous interest rate increases along the way (the noise), but the long-term trend was a decline in rates.
Turning to the stock market, it also exhibited significant moves during these two interest rate cycles.
From the end of 1964 to the end of 1981, the Dow Jones Industrial Average rose from 874 to 875. That’s no misprint. Over that 17-year period, the Dow rose exactly 1 point. In other words, it went nowhere. However, during that period, it rose as high as 1,052 and dropped as low as 578, according to Bloomberg. Here, the long-term secular trend in the equity market was to move sideways with lots of noise in between.
Fast forward to 1982. From its low in August that year, the Dow Jones Industrial Average took off on a 17+ year secular bull market that saw the Dow rise 15-fold, according to Bloomberg. And, yes, there was lots of noise during that 17-year bull run including the 22 percent decline – in one day on Black Monday – October 19, 1987.
Here’s the takeaway – markets are very noisy. While we monitor what happens in the short-term, we want you to focus on the long-term. Day-to-day fluctuations may top the headlines, but it’s the long-term trends that you should pay attention to.
Weekly Focus – Think About It
“Only put off until tomorrow what you are willing to die having left undone.”
--Pablo Picasso, Spanish painter, draughtsman, and sculptor
It’s been rather calm in the stock market lately.
For the past couple years, the euro zone debt problems and the “will we or won’t we relapse into a recession” worry have been on center stage. Now, Europe’s immediate liquidity issue has been patched and the U.S. economy seems to be on firmer footing. Accordingly, the stock market has responded to these developments and, last week, the S&P 500 index closed at its highest level in more than 3½ years, according to The New York Times.
Fear has declined, too. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, ended last week at about 17. That’s down from 48 reached last August and well below the 22-year average of 20.6, according to CNBC and Bloomberg. A low VIX suggests investors are less fearful of near-term market volatility.
Are there any worries on the horizon that could upset this calm?
Oil prices are one thing to keep an eye on. They rose 6 percent last week and closed at nearly $110 per barrel. Geopolitical tensions in the Middle East contributed to the rise as Iran is reportedly within sight of creating a nuclear bomb. That, of course, creates major headaches not only for the Middle East, but for the world in general.
On top of that, “There's also an oil pipeline dispute between Sudan and South Sudan in northeastern Africa; unrest in Syria, Yemen, and Nigeria; varying levels of tribal infighting in Iraq and Libya; and the possibility of leadership issues in Venezuela, where the president is undergoing his third surgery for an undisclosed type of cancer,” according to The Milwaukee Journal Sentinel.
So far, the stock market hasn’t flinched in the face of these flashpoints. However, an unexpected turn for the worse in any of these areas could trip the markets. And, since the S&P 500 index has more than doubled in value since the March 9, 2009 low, according to The New York Times, it might not take much to trigger a market correction.
As a financial advisor, we know that there is always something to worry about. Frankly, it’s our job to worry about what could go wrong so you don’t have to. The good news is, as a country we always seem to find a way to overcome whatever obstacle is thrown our way.
INVESTORS TEND TO GET CAUGHT UP IN THE DAY-TO-DAY NOISE of the financial markets even though the markets often move in long secular cycles that can last more than a decade. For example, let’s look at interest rates.
At the end of 1964, the 10-year U.S. Treasury note yielded 4.2 percent. Over the following nearly 17 years, the yield rose until it peaked at 15.8 percent in September 1981, according to Bloomberg. During that span, the yield fluctuated significantly (the noise), but the long-term secular trend was a rising interest rate environment.
Since that peak in September 1981, the yield on the 10-year Treasury has been in a more than 30-year long-term secular decline. In fact, the yield was a slim 2.0 percent last week – well below 1964’s 4.2 percent. This decline was interrupted by numerous interest rate increases along the way (the noise), but the long-term trend was a decline in rates.
Turning to the stock market, it also exhibited significant moves during these two interest rate cycles.
From the end of 1964 to the end of 1981, the Dow Jones Industrial Average rose from 874 to 875. That’s no misprint. Over that 17-year period, the Dow rose exactly 1 point. In other words, it went nowhere. However, during that period, it rose as high as 1,052 and dropped as low as 578, according to Bloomberg. Here, the long-term secular trend in the equity market was to move sideways with lots of noise in between.
Fast forward to 1982. From its low in August that year, the Dow Jones Industrial Average took off on a 17+ year secular bull market that saw the Dow rise 15-fold, according to Bloomberg. And, yes, there was lots of noise during that 17-year bull run including the 22 percent decline – in one day on Black Monday – October 19, 1987.
Here’s the takeaway – markets are very noisy. While we monitor what happens in the short-term, we want you to focus on the long-term. Day-to-day fluctuations may top the headlines, but it’s the long-term trends that you should pay attention to.
Weekly Focus – Think About It
“Only put off until tomorrow what you are willing to die having left undone.”
--Pablo Picasso, Spanish painter, draughtsman, and sculptor
Tuesday, February 21, 2012
Weekly Commentary February 21st, 2012
The Markets
Valentine’s Day is over, but there’s still a “whole lotta love” swirling around the stock market these days.
The Dow Jones Industrial Average closed last week at its highest level since May 2008 while the S&P 500 is knocking on the door of its highest close in almost four years, according to The Wall Street Journal. The gains were driven by optimism that Greece will get another bailout and better-than-estimated data on jobless claims, manufacturing, and housing, according to Bloomberg.
Even though the market has been rising, potential party spoilers abound.
You may have noticed the last time you filled your car gas prices are on the rise again. In fact, CNBC reported gas prices are at a record high for this time of year. The report says gas prices could hit an all-time record high this spring.
Gas prices aren’t the only thing on the rise. Tensions in Iran and the Middle East are stoking a rise in oil prices. Together, higher gas and oil prices could take a bite out of consumer and corporate wallets.
Over the weekend in Asia, China announced a change in its banking system reserve ratio in an effort to spur lending and economic growth. This monetary easing comes on the heels of a report that shows housing prices declined in 47 out of 70 major Chinese cities in January. Housing has been a strong economic engine for China for years and any slowdown there could cause problems.
Across the pond, new numbers show that Italy, Greece, Portugal, the Netherlands, and Belgium are now officially in recession, according to The Wall Street Journal. Even mighty Germany saw its economy slightly contract in the fourth quarter of 2011 compared to the third quarter.
Despite these negatives, the market seems to be climbing the proverbial “wall of worry.” Whether it will scale this wall and stay on top or fail to reach the top and retreat remains to be seen.
HOW MUCH INCOME WOULD YOU NEED to feel “rich?” Gallup recently conducted a poll and discovered that the median income needed by Americans to feel rich was $150,000. That is three times the roughly $50,000 median annual household income of Americans.
Probing a little deeper, the survey results revealed the following interesting points:
1) 15 percent of the respondents said they needed to earn $1 million or more to feel rich while 30 percent said $100,000 or less would make them feel rich.
2) Women said they needed $100,000 per year to feel rich while men needed $150,000.
3) College graduates needed $200,000 to feel rich while non-college graduates needed $100,000.
In a separate question, Gallup asked Americans how much net worth they would need to feel rich. The median response was $1 million.
So there you have it – to feel rich in America the average American needs either $150,000 in annual income or $1 million in net worth.
Now, let’s contrast that with our tax laws. The highest marginal tax rate starts when single filers or married couples filing jointly reach $379,150 in taxable income. That’s quite a bit above the median $150,000 number that was reported by Americans to make them feel rich.
According to Gallup, “The question of the point at which someone becomes rich certainly has policy implications in the United States. Gallup finds Americans now about evenly divided on whether the rich, broadly speaking, should be heavily taxed.”
You can expect to hear a lot more about tax policy during the upcoming elections later this year.
Weekly Focus – Think About It
Did you ever notice that when you put the words “The” and “IRS” together, it spells “THEIRS?”
--Author Unknown
Valentine’s Day is over, but there’s still a “whole lotta love” swirling around the stock market these days.
The Dow Jones Industrial Average closed last week at its highest level since May 2008 while the S&P 500 is knocking on the door of its highest close in almost four years, according to The Wall Street Journal. The gains were driven by optimism that Greece will get another bailout and better-than-estimated data on jobless claims, manufacturing, and housing, according to Bloomberg.
Even though the market has been rising, potential party spoilers abound.
You may have noticed the last time you filled your car gas prices are on the rise again. In fact, CNBC reported gas prices are at a record high for this time of year. The report says gas prices could hit an all-time record high this spring.
Gas prices aren’t the only thing on the rise. Tensions in Iran and the Middle East are stoking a rise in oil prices. Together, higher gas and oil prices could take a bite out of consumer and corporate wallets.
Over the weekend in Asia, China announced a change in its banking system reserve ratio in an effort to spur lending and economic growth. This monetary easing comes on the heels of a report that shows housing prices declined in 47 out of 70 major Chinese cities in January. Housing has been a strong economic engine for China for years and any slowdown there could cause problems.
Across the pond, new numbers show that Italy, Greece, Portugal, the Netherlands, and Belgium are now officially in recession, according to The Wall Street Journal. Even mighty Germany saw its economy slightly contract in the fourth quarter of 2011 compared to the third quarter.
Despite these negatives, the market seems to be climbing the proverbial “wall of worry.” Whether it will scale this wall and stay on top or fail to reach the top and retreat remains to be seen.
HOW MUCH INCOME WOULD YOU NEED to feel “rich?” Gallup recently conducted a poll and discovered that the median income needed by Americans to feel rich was $150,000. That is three times the roughly $50,000 median annual household income of Americans.
Probing a little deeper, the survey results revealed the following interesting points:
1) 15 percent of the respondents said they needed to earn $1 million or more to feel rich while 30 percent said $100,000 or less would make them feel rich.
2) Women said they needed $100,000 per year to feel rich while men needed $150,000.
3) College graduates needed $200,000 to feel rich while non-college graduates needed $100,000.
In a separate question, Gallup asked Americans how much net worth they would need to feel rich. The median response was $1 million.
So there you have it – to feel rich in America the average American needs either $150,000 in annual income or $1 million in net worth.
Now, let’s contrast that with our tax laws. The highest marginal tax rate starts when single filers or married couples filing jointly reach $379,150 in taxable income. That’s quite a bit above the median $150,000 number that was reported by Americans to make them feel rich.
According to Gallup, “The question of the point at which someone becomes rich certainly has policy implications in the United States. Gallup finds Americans now about evenly divided on whether the rich, broadly speaking, should be heavily taxed.”
You can expect to hear a lot more about tax policy during the upcoming elections later this year.
Weekly Focus – Think About It
Did you ever notice that when you put the words “The” and “IRS” together, it spells “THEIRS?”
--Author Unknown
Wednesday, February 15, 2012
Raising Financially Responsible Children
Being Financially Savvy is A Family Business
Like it or not, we’re all involved in running the “family business.” We worry that our parents might outlive their retirement savings. We’re comforted by the thought that family members would probably bail us out if we got into money trouble. We strive to help our children financially, and we’d like to bequeath them at least part of our nest egg.
In short, our family is our asset, liability, and legacy. Now here’s the contention: It’s time to build this notion into the way we manage our money.
Here are just some of the reasons why:
Raising Children: If your children grow up to be financial deadbeats, you may likely rise to the rescue. Indeed, your children could turn out to be your greatest financial liability.
Don’t want your adult children swimming in credit card debt, missing mortgage payments, and constantly asking you for money? Your best bet is to make sure problems never arise by raising money-savvy children.
That’s trickier than it seems. Children grow up spending their parent’s money, so it’s almost inevitable that they will have a skewed financial outlook. After all, for children, all purchases are free, so why should they fret about the price tag or control their desires?
Make your children feel like they’re spending their own money. Give them a candy allowance when they are younger and a clothing allowance when they are teenagers, and insist they live within this budget. This way, instead of you constantly saying “no” to your children, they will learn to say “no” to themselves.
Launching Adults: Once your children get into the work force, you want them to get into the “virtuous financial cycle” where they are steadily building wealth.
They will become able to own their home rather than renting, buy their cars rather than leasing, fully fund their 401(k) plan and their individual retirement accounts each year, and never carry a credit card balance.
The sooner your 20-something children get into this virtuous cycle, the easier it will be for them to meet their goals and less of a financial drain on you. To that end, encourage your children with your words and with your fine example.
A few financial incentives may also help. Tell your adult children if they scrounge together a house payment, you will lock in some additional dollars, or offer to subsidize their 401k contribution at 50 cents on the dollar.
This doesn’t mean you intend to fund their retirement instead of your own, but getting them started as investors sure seems like a smart idea.
Like it or not, we’re all involved in running the “family business.” We worry that our parents might outlive their retirement savings. We’re comforted by the thought that family members would probably bail us out if we got into money trouble. We strive to help our children financially, and we’d like to bequeath them at least part of our nest egg.
In short, our family is our asset, liability, and legacy. Now here’s the contention: It’s time to build this notion into the way we manage our money.
Here are just some of the reasons why:
Raising Children: If your children grow up to be financial deadbeats, you may likely rise to the rescue. Indeed, your children could turn out to be your greatest financial liability.
Don’t want your adult children swimming in credit card debt, missing mortgage payments, and constantly asking you for money? Your best bet is to make sure problems never arise by raising money-savvy children.
That’s trickier than it seems. Children grow up spending their parent’s money, so it’s almost inevitable that they will have a skewed financial outlook. After all, for children, all purchases are free, so why should they fret about the price tag or control their desires?
Make your children feel like they’re spending their own money. Give them a candy allowance when they are younger and a clothing allowance when they are teenagers, and insist they live within this budget. This way, instead of you constantly saying “no” to your children, they will learn to say “no” to themselves.
Launching Adults: Once your children get into the work force, you want them to get into the “virtuous financial cycle” where they are steadily building wealth.
They will become able to own their home rather than renting, buy their cars rather than leasing, fully fund their 401(k) plan and their individual retirement accounts each year, and never carry a credit card balance.
The sooner your 20-something children get into this virtuous cycle, the easier it will be for them to meet their goals and less of a financial drain on you. To that end, encourage your children with your words and with your fine example.
A few financial incentives may also help. Tell your adult children if they scrounge together a house payment, you will lock in some additional dollars, or offer to subsidize their 401k contribution at 50 cents on the dollar.
This doesn’t mean you intend to fund their retirement instead of your own, but getting them started as investors sure seems like a smart idea.
Monday, February 13, 2012
Weekly Commentary February 13th, 2012
The Markets
Who should you believe, Warren Buffett or Bill Gross?
Buffett and Gross are generally recognized as two of the world’s greatest investors. Buffett made his name in equities while Gross made his name in bonds as the head of Pimco, a trillion-dollar money management company. Both have outstanding multi-decade track records and both are billionaires.
Yet, today, they disagree on the merits of investing in “currency-based investments” such as money-market funds, bonds, mortgages, bank deposits, and other instruments.
Buffett says these investments “are among the most dangerous of assets. Their beta may be zero, but their risk is huge.” Further, he says, “Right now bonds should come with a warning label,” according to a February 9 Fortune magazine article.
His beef with currency-based investments is they do not protect you from the risk of inflation. You may get your principal back plus interest, but, in times of high inflation, your “real” return may not keep up with inflation and you could lose purchasing power.
Gross, on the other hand, has piled into bonds in a big way.
After dumping all of his U.S. government debt securities in early 2010, Gross has steadily built it back up according to Bloomberg.
Gross favors government securities in the 5- to 7-year maturity range because of the Federal Reserve’s pledge to keep short-term rates low.
Okay, how do you reconcile the divergent views of two outstanding investors? Quite likely it’s a matter of timing. Buffett is probably looking at a 7- to 10-year time horizon and, in that scenario, bonds might lose purchasing power and could experience capital losses if interest rates rise and bond prices decline.
Gross, though, is probably thinking shorter term. With the Fed’s pledge to keep interest rates low for the next couple years and the economy still stuck in slow motion, the risk of bond prices declining and inflation rising rapidly in the short term may be manageable.
Bottom line, it’s not just your outlook that matters, it’s also important to know the timeframe for your outlook.
WHAT IF the keepers of the Dow Jones Industrial Average added Apple to the index in 2009 instead of Cisco Systems? This is not just a hypothetical exercise; rather, it makes an important point about using indices to measure overall market performance.
In June 2009, General Motors and Citigroup were removed from the Dow 30 average and replaced by Cisco and Travelers Cos, according to Bloomberg. At the time, Cisco was trading at about $19.50 per share. Last week, Cisco traded at about $20.00 per share – essentially no change in nearly three years. By contrast, Apple was trading at about $143 per share in June 2009 and closed last week near $500 per share.
Unlike most other market indexes, the Dow Jones Industrial Average is a “price weighted” index, which means stocks with a higher price (e.g., Apple) have greater impact than lower-priced stocks (e.g., Cisco).
So, taking a look at the woulda, shoulda, coulda, Bespoke Investment Group recalculated where the Dow would be if Apple was added to the index in 2009 instead of Cisco. They discovered that instead of the Dow being in the 12,800 range last week, it hypothetically would have been near 14,600 – an all-time record high.
Notice how one stock could have made nearly a 2,000 point difference in the Dow index in less than three years. Of course, the reverse is also true. A stock could have been added to the Dow in 2009 and gone down the last couple years and taken the Dow down with it.
Here’s the point. We tend to think of indexes are representing “the market,” but, in reality, they represent the keepers of the indexes representation of the market. There’s human intervention in some of these indexes and that could greatly influence their performance.
In the end, the only index that matters is your index – the one that measures your progress toward reaching your goals. That’s the index we try to beat.
Weekly Focus – Think About It
“One must maintain a little bit of summer, even in the middle of winter.”
-- Henry David Thoreau, author, poet, philosopher
Who should you believe, Warren Buffett or Bill Gross?
Buffett and Gross are generally recognized as two of the world’s greatest investors. Buffett made his name in equities while Gross made his name in bonds as the head of Pimco, a trillion-dollar money management company. Both have outstanding multi-decade track records and both are billionaires.
Yet, today, they disagree on the merits of investing in “currency-based investments” such as money-market funds, bonds, mortgages, bank deposits, and other instruments.
Buffett says these investments “are among the most dangerous of assets. Their beta may be zero, but their risk is huge.” Further, he says, “Right now bonds should come with a warning label,” according to a February 9 Fortune magazine article.
His beef with currency-based investments is they do not protect you from the risk of inflation. You may get your principal back plus interest, but, in times of high inflation, your “real” return may not keep up with inflation and you could lose purchasing power.
Gross, on the other hand, has piled into bonds in a big way.
After dumping all of his U.S. government debt securities in early 2010, Gross has steadily built it back up according to Bloomberg.
Gross favors government securities in the 5- to 7-year maturity range because of the Federal Reserve’s pledge to keep short-term rates low.
Okay, how do you reconcile the divergent views of two outstanding investors? Quite likely it’s a matter of timing. Buffett is probably looking at a 7- to 10-year time horizon and, in that scenario, bonds might lose purchasing power and could experience capital losses if interest rates rise and bond prices decline.
Gross, though, is probably thinking shorter term. With the Fed’s pledge to keep interest rates low for the next couple years and the economy still stuck in slow motion, the risk of bond prices declining and inflation rising rapidly in the short term may be manageable.
Bottom line, it’s not just your outlook that matters, it’s also important to know the timeframe for your outlook.
WHAT IF the keepers of the Dow Jones Industrial Average added Apple to the index in 2009 instead of Cisco Systems? This is not just a hypothetical exercise; rather, it makes an important point about using indices to measure overall market performance.
In June 2009, General Motors and Citigroup were removed from the Dow 30 average and replaced by Cisco and Travelers Cos, according to Bloomberg. At the time, Cisco was trading at about $19.50 per share. Last week, Cisco traded at about $20.00 per share – essentially no change in nearly three years. By contrast, Apple was trading at about $143 per share in June 2009 and closed last week near $500 per share.
Unlike most other market indexes, the Dow Jones Industrial Average is a “price weighted” index, which means stocks with a higher price (e.g., Apple) have greater impact than lower-priced stocks (e.g., Cisco).
So, taking a look at the woulda, shoulda, coulda, Bespoke Investment Group recalculated where the Dow would be if Apple was added to the index in 2009 instead of Cisco. They discovered that instead of the Dow being in the 12,800 range last week, it hypothetically would have been near 14,600 – an all-time record high.
Notice how one stock could have made nearly a 2,000 point difference in the Dow index in less than three years. Of course, the reverse is also true. A stock could have been added to the Dow in 2009 and gone down the last couple years and taken the Dow down with it.
Here’s the point. We tend to think of indexes are representing “the market,” but, in reality, they represent the keepers of the indexes representation of the market. There’s human intervention in some of these indexes and that could greatly influence their performance.
In the end, the only index that matters is your index – the one that measures your progress toward reaching your goals. That’s the index we try to beat.
Weekly Focus – Think About It
“One must maintain a little bit of summer, even in the middle of winter.”
-- Henry David Thoreau, author, poet, philosopher
Monday, February 6, 2012
Weekly Commentary February 6th, 2012
The Markets
How do you spell market rally? How about “Jobs.”
A much higher than expected 243,000 jobs were added to our economy in January and that helped push the Dow Jones Industrial Average to its highest close since May 2008, according to Bloomberg. On top of that, the unemployment rate dropped to 8.3 percent – the lowest since February 2009.
More good economic news came from the services sector as the pace of growth in January accelerated to its highest level in nearly a year, according to the widely followed index from The Institute of Supply Management and reported by CNBC.
While the overall economy has gained some momentum lately, the housing market is still stuck in the gutter. According to data released last week, the S&P/Case-Shiller index of home prices in 20 major cities declined 3.7 percent in the 12 months ending November 2011. Since its 2006 peak, average homes prices in the index have dropped 33 percent and prices are now back to where they were in mid-2003.
On the bright side, if you’re looking to buy a house or refinance, now is a great time. The average rate on a 30-year fixed-rate mortgage fell to 3.87 percent last week. That’s an all-time record low, according to MarketWatch.
Overall, after a scare back in the fall of 2011, the economy seems to be gaining steam and stock prices have reflected that. The big question remains… is this sustainable growth or is it temporarily driven by government stimulus and intervention?
CAN THE INTERSECTION OF TWO MOVING AVERAGES foretell the future direction of the stock market? Chart watchers like to follow what’s called the 50-day moving average (50 DMA) and the 200-day moving average (200 DMA). These are lines which plot the closing price of the S&P 500 index for the last 50 and 200 days. When a new day is added, the oldest day is dropped off, hence the term “moving” average.
The 200 DMA is supposed to reflect the longer-term “wave” or trend in the market while the shorter 50 DMA captures the shorter-term trend or momentum. How these two lines move relative to each other is what gets chart watchers excited.
Last week, the 50 DMA crossed above the slower moving 200 DMA. Market technicians refer to this as a “golden cross.” In layman’s terms it’s considered a bullish market signal, according to CNBC. In fact, Birinyi Associates said that in the 26 instances since 1962 when the 50 DMA crossed above the 200 DMA, the market was higher six months later 81 percent of the time.
Not surprisingly, when the 50 DMA crosses below the 200 DMA, there’s a name for that, too. It’s called a “death cross” and it’s supposed to signal bad times ahead. However, the last two “death crosses,” which occurred on August 15, 2011 and July 2, 2010, were not very prescient, according to The Wall Street Journal.
And, we can get further carried away with the funny technical names by throwing in the “Hindenburg Omen.” By its very name you can tell it’s not something you want to see in the markets, and, we’re happy to report, it is not being signaled right now.
Okay, does all this technical stuff really matter? It matters to the extent that some serious market participants invest based on these technical signals and their buying and selling based on these signals may affect the markets.
So, whether you believe in this type of market analysis or not, it may be helpful to at least be aware of it.
Weekly Focus – Does this make sense?
Of our five senses, which one do you think is most important? Interestingly, if brain space indicates the importance of a sense, then vision is the most important. According to The National Geographic Society, roughly 30 percent of neurons in the brain's cortex are devoted to vision. By contrast, just 8 percent are devoted for touch and 2 percent for hearing.
How do you spell market rally? How about “Jobs.”
A much higher than expected 243,000 jobs were added to our economy in January and that helped push the Dow Jones Industrial Average to its highest close since May 2008, according to Bloomberg. On top of that, the unemployment rate dropped to 8.3 percent – the lowest since February 2009.
More good economic news came from the services sector as the pace of growth in January accelerated to its highest level in nearly a year, according to the widely followed index from The Institute of Supply Management and reported by CNBC.
While the overall economy has gained some momentum lately, the housing market is still stuck in the gutter. According to data released last week, the S&P/Case-Shiller index of home prices in 20 major cities declined 3.7 percent in the 12 months ending November 2011. Since its 2006 peak, average homes prices in the index have dropped 33 percent and prices are now back to where they were in mid-2003.
On the bright side, if you’re looking to buy a house or refinance, now is a great time. The average rate on a 30-year fixed-rate mortgage fell to 3.87 percent last week. That’s an all-time record low, according to MarketWatch.
Overall, after a scare back in the fall of 2011, the economy seems to be gaining steam and stock prices have reflected that. The big question remains… is this sustainable growth or is it temporarily driven by government stimulus and intervention?
CAN THE INTERSECTION OF TWO MOVING AVERAGES foretell the future direction of the stock market? Chart watchers like to follow what’s called the 50-day moving average (50 DMA) and the 200-day moving average (200 DMA). These are lines which plot the closing price of the S&P 500 index for the last 50 and 200 days. When a new day is added, the oldest day is dropped off, hence the term “moving” average.
The 200 DMA is supposed to reflect the longer-term “wave” or trend in the market while the shorter 50 DMA captures the shorter-term trend or momentum. How these two lines move relative to each other is what gets chart watchers excited.
Last week, the 50 DMA crossed above the slower moving 200 DMA. Market technicians refer to this as a “golden cross.” In layman’s terms it’s considered a bullish market signal, according to CNBC. In fact, Birinyi Associates said that in the 26 instances since 1962 when the 50 DMA crossed above the 200 DMA, the market was higher six months later 81 percent of the time.
Not surprisingly, when the 50 DMA crosses below the 200 DMA, there’s a name for that, too. It’s called a “death cross” and it’s supposed to signal bad times ahead. However, the last two “death crosses,” which occurred on August 15, 2011 and July 2, 2010, were not very prescient, according to The Wall Street Journal.
And, we can get further carried away with the funny technical names by throwing in the “Hindenburg Omen.” By its very name you can tell it’s not something you want to see in the markets, and, we’re happy to report, it is not being signaled right now.
Okay, does all this technical stuff really matter? It matters to the extent that some serious market participants invest based on these technical signals and their buying and selling based on these signals may affect the markets.
So, whether you believe in this type of market analysis or not, it may be helpful to at least be aware of it.
Weekly Focus – Does this make sense?
Of our five senses, which one do you think is most important? Interestingly, if brain space indicates the importance of a sense, then vision is the most important. According to The National Geographic Society, roughly 30 percent of neurons in the brain's cortex are devoted to vision. By contrast, just 8 percent are devoted for touch and 2 percent for hearing.
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