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Market Commentary
Economic Updates
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Weekly Commentary
November 23, 2009
The Markets
Would you willingly give the government your
money and expect nothing in return? Last week, that is exactly what happened.
Treasury bills maturing in January 2010
actually yielded -0.01% last Friday. The last time interest rates were negative
was at the height of the credit crisis in late 2008 as panicked investors
sought refuge in short-term government paper, according to The Wall Street Journal. Fortunately, this time around, panicked
investors were not the reason for the negative rates.
Many large institutional investors have
reaped significant gains in this year's bull market and, rather than risk
giving back some of those gains in an end-of-the-year swoon, some of those
investors decided to park their cash in ultra-short Treasury bills. This strong
demand for the bills, plus a temporary shortage of T-bills available for
investment, helped drive the yields to effectively zero.
While the above explanation for the zero
interest rates makes sense, there is always the possibility that there is more
to the story. If large investors felt the rally would continue, would they risk
missing it? We are always mindful that what "makes sense" may not always make
money. Accordingly, we remain vigilant for any sign that the bull market is
tired and ready to take a nap.
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Data
as of 11/20/09
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1-Week
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Y-T-D
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1-Year
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3-Year
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5-Year
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10-Year
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Standard & Poor's 500
(Domestic Stocks)
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-0.2%
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20.8%
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36.4%
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-8.0%
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-1.5%
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-2.6%
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DJ Global ex US (Foreign
Stocks)
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-1.4
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37.0
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61.5
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-4.6
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4.2
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1.2
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10-year Treasury Note
(Yield Only)
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3.4
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N/A
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3.1
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4.6
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4.2
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6.1
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Gold (per ounce)
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3.3
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31.1
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54.5
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22.2
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20.5
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14.5
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DJ-UBS Commodity Index
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2.5
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15.1
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14.9
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-7.0
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-2.4
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3.8
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DJ Equity All REIT TR
Index
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-0.5
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18.7
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81.8
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-14.2
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0.3
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10.3
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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.
A COMMON MISTAKE MADE BY
INVESTORS is
to confuse the performance of the economy with the performance of the stock
market. Logically, you would expect the economy and the stock market to move
somewhat in synch. That is, if the economy does well, the stock market should
do well and vice versa. Directionally, that is usually correct, but the degree
of the moves could vary significantly.
This
year is a great example of how the economy and the stock market are moving in
the same direction, but the degree of the moves in each are way out of
proportion. Specifically, the economy is slowly stumbling its way out of the
recession while the stock market has been on a tear with the S&P 500 index
rising more than 20% year-to-date.
How
can stocks rise so dramatically when the economy is still lethargic? In a word
- earnings. As the economy started to tank last year, corporate America quickly
slashed costs. With a lowered cost structure, it only took a small up-tick in
business to produce outsized earnings. In fact, Thomson Reuters said 80% of the
S&P 500 companies reported third-quarter earnings that beat Wall Street
estimates. To be fair, the earnings were better than Wall Street expected, but
they were still generally down from all-time highs.
UBS
stock-market strategist Thomas Doerflinger came up with a clever way to
describe this rapid improvement in earnings against a slow moving economy. He
called it a "'V' shaped recovery in profits in a 'U' shaped economy." Major cost-cutting
essentially levered corporate earnings power so a small improvement in the
economy could translate into a much larger profit improvement.
For
bulls, this leverage means we could see record corporate profits before we see
record corporate revenue. Sadly, for employees, this could be a "jobless
recovery," but for investors, it could be a profitable one.
Weekly Focus - Think About
It
"Would
our disappearance leave the world poorer, or just less crowded?"
--Harold Kushner
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Best regards,
Jim Forcella, CFP®, CFS
LPL Branch Manager
LPL Investment Adviser Representative
CA Insurance License #0635256
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.
Closing Reminders - Should your personal or financial situation change (i.e. Marital or employment status, beneficiary changes or income needs) please contact us at 530.222.6301 or 800.546.5573 for either a phone review, or an appointment. We want to ensure that your current financial objectives meet your personal circumstances.
Forcella Wealth Management Information - Are you receiving too much mail regarding your investments? You now have the option to receive your LPL Financial communications electronically! LPL Financial is pleased to offer the convenience of viewing shareholder communications, including the fund prospectus, annual reports, and proxy statements online. Visit the link below to be directed to a secure website where you will enter your LPL Financial account number and Email address. You will no longer receive shareholder communications information through the mail but can request a hard copy at any time. Please feel free to contact us if you have any questions regarding this form.
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Forcella Wealth Management
1600 Victor Ave ● Redding, CA 96003
Phone 530.222.6301 ● Toll Free 800.546.5573 ● Fax 530.226.1677
jim.forcella@lpl.com ● www.forcellawealth.com
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* This newsletter was prepared by PEAK.
* 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.
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Opinions expressed are subject to change without notice and are not intended as
investment advice or to predict future performance.
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Past performance does not guarantee future results.
*
You cannot invest directly in an index.
*
Consult your financial professional before making any investment decision.
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Securities Offered Through LPL Financial Member FINRA/SIPC
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