Monthly Archives: July 2012

Weekly Market Commentary 7/30/12

The Markets

 

“Within our mandate, the ECB is willing to do whatever it takes to preserve the euro and, believe me, it will be enough.”

–Mario Draghi, European Central Bank (ECB) President

 

It’s quite amazing how one sentence from one man can help spark a major rally in stocks, bonds, and the euro currency. Draghi’s comments last Thursday in London represent a significant ramping up of the ECB’s willingness to use its resources to hold the euro together and investors responded enthusiastically. On the day of Draghi’s comments:

 

  • The euro and the British pound each gained more than 1 percent against the U.S. dollar.
  • Stocks were positive in nearly all European markets.
  • Italian and Spanish indexes each jumped more than 5 percent.
  • The Spanish 10-year bond yield dropped nearly half a percentage point from the day before and the 10-year Italian bond yield was down a similar amount.
  • The S&P 500 index rallied 1.6 percent.

Sources: The Wall Street Journal; CNBC

 

Between Draghi in Europe and Fed Chairman Ben Bernanke in the U.S., central bankers seem to be exerting an outsized influence on the markets. Normally, you expect markets to roughly trend with corporate earnings.

 

Speaking of earnings, several high-profile companies including Amazon, Facebook, and Starbucks, fell short on their second quarter earnings numbers released last week, according to CNBC. Overall, earnings for the companies reporting so far this quarter have been a bit on the light side, according to CNBC.

 

While earnings ultimately matter in the long run, today’s markets seem focused on the support provided by central banks. And, yes, an up market is an up market regardless of what’s propelling it. However, for long-term sustainability, we need the markets to go up based on their earnings growth – not artificial stimulus.

 


Data as of 7/27/12

1-Week

Y-T-D

1-Year

3-Year

5-Year

10-Year

Standard & Poor’s 500 (Domestic Stocks)

1.7%

10.2%

7.3%

12.2%

-1.0%

4.4%

DJ Global ex US (Foreign Stocks)

0.9

1.4

-16.9

2.3

-6.6

5.8

10-year Treasury Note (Yield Only)

1.6

N/A

3.0

3.7

4.8

4.5

Gold (per ounce)

2.7

2.8

-0.4

19.2

19.6

18.2

DJ-UBS Commodity Index

-1.9

2.0

-13.1

5.1

-3.4

4.0

DJ Equity All REIT TR Index

1.0

17.2

13.6

29.4

4.9

11.3

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.

 

THE BEST AND THE WORST DAYS IN THE STOCK MARKET tend to occur rather close to each other and that has major implications for how to be a successful investor.

 

While it’s tempting to try to aggressively “time” the stock market and be in on the best days and sitting in cash on the worst days, that’s not a viable strategy. The chart below shows how just a few days each decade made a profound impact on the performance of the market over that decade. 

 

 

 

Decade

Annualized Return by Decade

Return Excluding 10 Best Days

Return Excluding 20 Best Days

Return Excluding 30 Best Days

Return Excluding 40 Best Days

1970s

1.6%

-2.3%

-5.0%

-7.2%

-9.1%

1980s

12.6

7.6

4.6

2.0

-0.4

1990s

15.3

11.0

8.0

6.0

3.0

2000s

-2.7

-9.2

-13.2

-16.9

-19.5

Source: BMO Capital Markets

 

For example, during the 1980s, the S&P 500 had an average annualized return of 12.6 percent. However, if you excluded the return of the 40 best days during that decade, then the return would have fallen to a negative 0.4 percent. In other words, just 40 days out of that 10-year period accounted for all of the return for the decade. Wow!

 

Now, you also have to know that missing the 40 worst days during the decade would have a profound positive impact on your performance. But, here’s the rub – it would take perfect foresight to know in advance when these 40 best and worst days would occur. And, of course, none of us have that.

 

What makes aggressive timing even more difficult is that these best and worst days often happen pretty close to each other. BMO Capital Markets discovered that since 1970, more than 50 percent of the 40 best days occurred within two weeks of one of the 40 worst days! So, imagine this… the stock market has one of its worst 40 days for the decade and you are lucky enough to be sitting 100 percent in cash that day. Now, realistically, after a big drop like that, are you going to have the nerve to jump 100 percent right back in? If you didn’t, you’d miss more than half of the 40 biggest up days since those big up days often occur within two weeks of a big down day.

 

The lesson here is simple. Markets are volatile and the price of long-term return is enduring the pain of periodic declines.   

 

Weekly Focus – Think About It…

 

“The most important thing in the Olympic Games is not winning, but taking part; the essential thing in life is not conquering, but fighting well.”

–Pierre de Coubertin, founder of the modern Olympic Games

 

Best regards,

 

Margie

Margie Shard, CFP®
President & Wealth Advisor
Shard Financial Services, Inc.

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.

 

* This newsletter was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the named broker/dealer.

* 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 theLondonafternoon 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 Weekly Market Commentary please reply to this e-mail with    “Unsubscribe” in the subject line, or write us at 1537 N. Leroy, Fenton MI 48430.

 

Sources:

http://online.wsj.com/article/SB10000872396390443477104577550710566458228.html?mod=WSJ_hp_LEFTWhatsNewsCollection

http://www.cnbc.com/id/48335105/

http://www.cnbc.com/id/48335982

http://research-ca.bmocapitalmarkets.com/documents/F0D72405-29FD-46E1-A800-3AC70C262AE0.PDF

http://www.psychologytoday.com/blog/here-there-and-everywhere/201207/27-quotes-the-olympics

 

Wall Street Journal article offers tips for keeping government from claiming ‘inactive’ accounts

The Wall Street Journal’s Carolyn T. Geer writes an interesting piece that is a must-read for investors. It’s about the importance of keeping an eye on your dividend reinvestment plans and direct deposit of dividend accounts, because state governments are eyeing “inactive” broker accounts for escheatment—the age-old right of a government to claim “abandoned” property. Read the full article here, which addresses which kinds of investments might be vulnerable.

 

 

Weekly Market Commentary 7/23/12

The Markets

The man with his finger on the pulse says the U.S. economy faces two main risks. We have no control over one of those risks and the other, well, we do have some control, but whether our politicians will appropriately exercise that control is a big question.

Federal Reserve Chairman Ben Bernanke faced Congress last week and he delivered a rather subdued outlook in his semi-annual monetary policy report. He said our economy faces two major headwinds:

  1. The Euro-area fiscal and banking crisis and its potential spillover effects on our economy.
  2. The unsustainable path of the U.S. fiscal situation (e.g., the “fiscal cliff”).

Source: Federal Reserve

The U.S. has little control over the euro-area situation so we’re at the mercy of European leaders to make bold and tough decisions to get their houses in order. The second item, though, is clearly within our control.

The so-called fiscal cliff, in which a series of tax hikes and spending cuts will take effect in 2013 if Congress takes no further action, could throw the economy back into a recession. The Congressional Budget Office estimates if no policy changes are made, then our 2013 federal budget deficit will decline by about $600 billion. On the surface, that sounds great. However, such a huge shock to our system in a short period of time could be problematic.

So, will Congress agree to adjust the legislation for the benefit of the economy? We’ll see.

For his part, Bernanke said the Federal Reserve “is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.” It’s good to know that the Fed is ready to help if needed.


Data as of 7/20/12

1-Week

Y-T-D

1-Year

3-Year

5-Year

10-Year

Standard & Poor’s 500 (Domestic Stocks)

0.4%

8.4%

2.8%

12.7%

-2.3%

5.2%

DJ Global ex US (Foreign Stocks)

0.6

0.5

-16.9

3.3

-7.8

5.6

10-year Treasury Note (Yield Only)

1.5

N/A

2.9

3.6

5.0

4.6

Gold (per ounce)

-1.2

0.1

-0.6

18.3

18.3

17.2

DJ-UBS Commodity Index

4.2

3.9

-11.1

6.3

-3.4

3.8

DJ Equity All REIT TR Index

-1.1

16.0

9.5

31.4

2.7

12.1

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.

IT’S BEEN ALMOST A YEAR since August 5, 2011, the day the U.S. lost its coveted AAA credit rating from Standard and Poor’s. So, how have the financial markets responded in the year since? Quite well, actually.

It may not feel like it, but the broad U.S. stock market, as measured by the S&P 500 index, rose 13.6 percent between August 5, 2011 and last Friday, according to data from Yahoo! Finance. Despite all the angst from the credit downgrade, the threat of a double-dip recession and the turmoil in Europe, the stock market has hung in there.

The returns in the bond market are perhaps even more startling. The 10-year Treasury yielded 2.56 percent on August 5, 2011 and by last Friday, the yield had dropped to 1.46 percent, according to Yahoo! Finance. Normally, you might expect interest rates to rise after a credit downgrade since the ratings agency is essentially saying your bonds are riskier than previously thought.

The U.S., though, is perhaps a “special” case. The day after the credit downgrade, none other than Warren Buffett went on Bloomberg television and said he thought the U.S. should be a “quadruple A” rating. And, to this day, the U.S. dollar remains the world’s leading reserve currency as more than 60 percent of the world’s foreign currency reserves are held in U.S. dollars, according to BusinessWeek.

We shouldn’t get overconfident, though. While the U.S. has tremendous assets, it might only take a few bad decisions from our leaders to undo what took decades to build.

Weekly Focus – Think About It…

“There is nothing wrong with America that the faith, love of freedom, intelligence, and energy of her citizens cannot cure.”

Dwight D. Eisenhower, 34th president of the United States

Best regards,

Margie

Margie Shard, CFP®
President & Wealth Advisor
Shard Financial Services, Inc.

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.

* This newsletter was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the named broker/dealer.

* 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 theLondonafternoon 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 Weekly Market Commentary please reply to this e-mail with    “Unsubscribe” in the subject line, or write us at 1537 N. Leroy, Suite D, Fenton MI 48430.

Sources:

http://federalreserve.gov/newsevents/testimony/bernanke20120717a.htm

http://cbo.gov/publication/43262

http://finance.yahoo.com/q/hp?s=%5EGSPC&a=07&b=1&c=2011&d=07&e=17&f=2011&g=d

http://finance.yahoo.com/q/hp?a=07&b=1&c=2011&d=07&e=17&f=2011&g=d&s=%5Etnx&ql=1

http://www.bloomberg.com/news/2011-08-06/buffett-says-s-p-s-downgrade-mistaken-still-doesn-t-see-another-recession.html

http://www.businessweek.com/ap/2012-07-11/euros-global-use-down-slightly-during-crisis

http://www.quotationspage.com/quote/32154.html