Weekly Commentary
January 19, 2010
The Markets
Former Federal Reserve Chairman Paul Volcker
was back in the news last week as he warned that the financial system needs
broad reform or else we run the risk of another financial crisis.
You may remember Volcker as the
cigar-chomping Fed Chairman from 1979 to 1987 who raised interest rates
dramatically to try and break the back of inflation in the early 1980s. He
succeeded, but the price for success was a major recession.
During his speech last week to the Economic
Club of New York, Volcker argued that the Federal Reserve should be a key
player in overseeing the financial system and that they, "should have the power
to dismantle big banks that pose a systemic risk to the economy," according to
CNNMoney.com.
Volcker worries that as the economy continues
to heal, the urgency for reform will fade and that will set the stage for the
next crisis. While we will likely get some type of financial reform in coming
months, we hope that it will preserve the principles that have made our country
so great.
Ironically, on the day Volcker spoke, the
S&P 500 index hit a fresh 52-week high, according to Briefing.com.
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Data
as of 1/15/10
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1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
|
|
Standard & Poor's 500
(Domestic Stocks)
|
-0.8%
|
1.9%
|
33.6%
|
-7.4%
|
-1.0%
|
-2.5%
|
|
DJ Global ex US (Foreign
Stocks)
|
0.3
|
3.0
|
55.9
|
-5.0
|
4.4
|
0.9
|
|
10-year Treasury Note
(Yield Only)
|
3.7
|
N/A
|
2.2
|
4.8
|
4.2
|
6.8
|
|
Gold (per ounce)
|
0.1
|
2.2
|
39.3
|
21.6
|
21.7
|
14.7
|
|
DJ-UBS Commodity Index
|
-3.0
|
-0.8
|
24.0
|
-4.5
|
-1.1
|
3.7
|
|
DJ Equity All REIT TR
Index
|
-0.1
|
-0.2
|
49.5
|
-13.4
|
1.5
|
10.6
|
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.
BACK IN EARLY MARCH 2009, there was palpable fear in
the markets. Our banking system was on the verge of collapse, unemployment was
skyrocketing, and the stock market was touching 12-year lows. But on March 10,
the collective psychology changed, the market turned around, and since then
we've witnessed one of the greatest short-term bull markets in history.
What
do we do for an encore in 2010?
Before
we figure out 2010, we need to understand what drove the 2009 bull market.
While it may be a little early to write the history of 2009, we can make some
observations that provide a framework and context for the great reflation.
With
the benefit of hindsight, here are some reasonable conclusions on what drove
the 2009 bull market:
- The Federal Reserve
flooded the economy with easy money. This money had to go somewhere and
some of it found its way to the financial markets.
- With short-term
savings rates near zero, investors had to move out on the risk spectrum
(e.g., stocks, commodities, high-yield bonds) in order to have a chance at
higher returns.
- China implemented a
massive stimulus program that kept their economic engine running and that
helped goose other countries' economies.
- There was a one-time
re-pricing of risk as investors realized the world was not coming to an
end, so they snapped up stocks that were perceived as "generational"
bargains.
One
of the tenets of investing is that there is "no free lunch." In this case, it
means the government cannot endlessly flood the economy with stimulus. If they
try, there may be repercussions such as unacceptable inflation, a crashing
currency, and soaring deficits.
Here's
the key question as 2010 unfolds: Can the economy get on a self-sustaining
growth path without further government stimulus?
If
we are over the hump and the economy is self-sustaining, that may bode well for
the markets in 2010. Conversely, if the economy still needs substantial
government help, investors may get nervous again. The tug-of-war between
investors who believe the former versus the latter may be the defining dynamic
in the 2010 market. Regardless of which comes to fruition, we'll continue to do
our best to help you meet your long-term goals.
Weekly
Focus - Think About It
Our
thoughts and prayers are with the people of Haiti and the relief workers who
are trying to help them.
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