The financial press was quick to proclaim the best January for the Dow in years...and at +3.4%, it was. Just how good was it? You'd have to go back to 1997 when the Dow Industrials opened the year with returns of 5.7% to find a stronger January. If you average January returns from 1997 through 2012, you get a dismal -0.7%.
The "January Effect" says that when January is good, the rest of the year is good, and it is right about 85% of the time. Pent-up investor demand for stocks which would usually drive prices higher is being offset by uncertainty over just how far economic weakness in Europe and even China might reach and impact the US. We're also watching the winding down of earnings season which has been punctuated with multiple reports of a few, high-profile companies beating expectations, but on the whole is a bit behind the curve.
At current levels, the Dow is still well below its all-time, late 2007 high so our expectation is that the Dow will continue to struggle with breaking above the 13,000 level and will not be able to move much higher than that until a deal is made in Europe that minimizes the fallout from the PIIGS and their debt problems.
Correlation and volatility are on the decline, which means higher gains will be found in individual stocks rather than broader-market indices. The Fed's promise of continued low interest rates through 2014 and the president's new mortgage bail out will further encourage investors to return to stocks with cash that has been in bonds or completely out of the market for years.
The markets responded favorably to Friday's unemployment report, which was much-better-than-expected. 257,000 private sector jobs were offset by only 14,000 government layoffs for the best monthly jobs number since March of 2006, ignoring the 277,000 and 458,000 jobs created by part-time census hiring in April and May of 2010. The unemployment rate dropped to 8.3% from 8.5%.
Talk about a moving target...last month, November's jobs were revised lower by 20,000. This month, they were revised higher by 57,000. December's first revision was from 200,000 to 203,000. Two other pieces of the puzzle, average hourly earnings and the average workweek both rose slightly, which is also a sign of a strengthening jobs market.
The single-largest crack in the foundation of all this jobs optimism is the participation rate, or how many folks are looking for work. The seasonally-adjusted participation rate is at a low not seen since 1983. The country still has 5.6 million fewer jobs than it had at the beginning of the recession in 2007. There are 12.8 million people out of work and another 11 million people working part-time who would rather be working full time, or who have quit looking for work.
It is still going to take many months, if not years of job creation at around the 400,000/month level to push the unemployment rate back below 6%, but it does look like things continue to improve, and as the US economy improves, most of the rest of the world will follow.
As is usually the case, there is a lot more going on behind the scenes in Washington D.C. than the media is willing to expose. This month, I'm going to highlight the complete breakdown going on at the Securities and Exchange Commission with regards to the fiduciary standard.
This is not the most-exciting topic and I'll try to keep it brief, but it seems the SEC has decided to protect their image rather than investors' best interests.
The heart of the rule is this: Anyone selling you advice or counsel has a responsibility to act in your best interest while someone selling you investment products only has to find things that are suitable. The term is "fiduciary" and it is the key difference to what separates most financial planners and investment advisors from brokers.
An investment advisor and a broker may both reach the conclusion that you should own a widget as part of your investment portfolio. The difference to you is that the investment advisor is held to the fiduciary standard and must find you the widget and buy it on your behalf in a way that demonstrates your best interest was placed before his, or his company's. The broker, having also concluded you should have a widget is free to sell you a higher-priced one, or one for which he or his company are incentivized to sell through higher sales commissions and other perks.
To further muddy the waters, several brokerages, like Merrill Lynch (for whom the exempting rule is named) have been allowed to put clients under fee-based management contracts with brokers who essentially function as advisors but who are held to a lesser standard, i.e., they're not fiduciaries, but they're paid as if they were. Perhaps needless to say, but the wirehouses like Merrill and in some cases the banks who own them have been huge and generous opponents to any change in the standard.
Caveat emptor. Buyer beware. You owe it to yourself to know the difference. We are, and always have been investment advisors with a fiduciary responsibility to put our clients' best interest above our own. While it means we've made less money than some of our commissioned counterparts on the brokerage side of things, we still believe it is the best and most-ethical way to do business, and we're not going to change that...even if the SEC continues to allow the double standard.
That's enough commentary and enough politics for this month, other than this wonderfully observant quote credited to Oscar Ameringer. "Politics is the gentle art of getting votes from the poor and campaign funds from the rich, by promising to protect each from the other." Just sit back and watch the race to November unfold and tell me this isn't spot on.
This one from Jimmy Fallon is pretty good too. "Donald Trump announced that he's endorsing Mitt Romney for president. It was really nice. Trump was like, 'There's only one man with the brains, the skills, and the charisma to be president - but since I'm not running, you might as well vote for Mitt Romney.'"
We'll update things again early next month. In the meantime, don't hesitate to call or e-mail if you have any questions.
