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Market Commentary
Economic Updates
Recent News |
Weekly
Commentary
February 16,
2010
The Markets
The
Reuters/University of Michigan consumer sentiment preliminary index for
February that was reported last week declined slightly from the late January
number and it was lower than expected as consumers continued to fret over
unemployment. The index is now down 24% from January 2007, according to data
from the St. Louis Federal Reserve. Ironically, when consumers are glum, that
could be good news for the financial markets.
A 2002 study
by Meir Statman and Kenneth Fisher found that, "Low consumer confidence is
followed by high stock returns more often than it is followed by low stock
returns." That seems a little counterintuitive because you would expect
apprehensive consumers to be in no mood to buy financial securities and push
their prices higher. On the contrary, though, the authors said, "When
people lose confidence as consumers, they should regain it as investors."
So, how does
this make sense?
Not
surprisingly, declining financial markets tend to drag down consumer
confidence. However, at some point, financial markets typically revert to the
mean and start heading up again. Often, financial markets start heading up
before consumer confidence does. This suggests that consumer sentiment is a
contrarian indicator, according to Mark Hulbert at MarketWatch.
Does this
mean you should base your entire investment strategy on the level of the
consumer sentiment index? No. Sentiment is just one of many indicators that may
play a role in the complex interplay of factors that affect asset prices. Oh,
and just for the record, the U.S. stock market did rise last week so the
consumer sentiment "contrarian" indicator did work--at least for one
week!
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Data as of 2/12/10
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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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0.9%
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-3.6%
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30.1%
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-9.1%
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-2.3%
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-2.5%
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DJ Global
ex US (Foreign Stocks)
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1.4
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-6.3
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44.4
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-8.5
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1.9
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0.1
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10-year
Treasury Note (Yield Only)
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3.7
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N/A
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2.7
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4.8
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4.1
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6.5
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Gold (per
ounce)
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2.3
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-2.0
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14.7
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17.6
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20.6
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13.4
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DJ-UBS
Commodity Index
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2.7
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-6.6
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19.2
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-7.4
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-2.4
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2.8
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DJ Equity
All REIT TR Index
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-0.5
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-6.1
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52.5
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-16.5
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0.0
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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.
THE DRUG OF EASY MONEY
will
eventually be withdrawn from the worldwide economy since governments cannot
indefinitely spend (or create) money that they don't have. The question of when
and how that happens is looming large over the financial markets. Just in the
U.S. alone, we invested (spent?) trillions of dollars propping up the economy,
according to CNN, and so far, it has helped avert a potentially even larger
disaster. Unfortunately, it may have just delayed the next day of reckoning.
So, how do
you withdraw the drug of easy money from an economy without tipping it back
into a recession? Very carefully! The
Economist has identified three key issues to address
in order to pull off an effective exit strategy.
First, you
have to get the timing right. If you pull the stimulus too soon, you might end
up with a relapse into recession. If you let the stimulus slosh through the
economy too long, it could break the budget, lead to unacceptable inflation, or
cause new bubbles to form.
Second, you
have to get the tactics right. The two main tactics include cutting the
government budget and raising interest rates. However, if you cut the budget
too much, you run the risk of--you guessed it--another recession. Ditto for
raising interest rates too soon.
Third, you have
to get the technique right. The U.S., in particular, was zealous in creating
newfangled funding mechanisms, bailout programs, backstop guarantees, and
lending facilities to stop the market meltdown in 2008-09. How we unwind these
programs may have a big impact on the economy so we have to get this right,
too.
Ultimately,
there are no easy answers to these three issues,
yet they are vitally important to our economic future. And, the best way to
monitor how effective the government is in answering these issues is to follow the reaction in the financial
markets. Of course, we do that on your behalf so you can spend your time in
areas that are most important to you.
Weekly Focus - Think
About It
"Nobody
can go back and start a new beginning, but anyone can start today and make a
new ending."
--Maria
Robinson
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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.
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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.
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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.
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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.
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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.
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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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