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Market Commentary
Economic Updates
Recent News |
Weekly Commentary
March 1, 2010
The
Markets
Three months ago, on December 1,
2009, the S&P 500 closed at 1,108. Last week it closed at 1,104. After
three months, the net movement in the stock market was just 4 points. Hmm. What
does that tell us about investing? Here are a few thoughts that come to mind.
First, there is a lot of noise out
there. What may seem like big news on the day it comes out (e.g., new U.S. home
sales plunged in January 2010 to the lowest level on record dating back to
1963, according to the Department of Commerce), may actually just be one piece
of information that briefly affects the markets and then is quickly forgotten.
Second, investing is a game of
patience. As the past three-month stretch shows, the stock market can stay flat
for a long period. Okay, three months is not exactly "a long period,"
but there are historical precedents for the stock market staying flat for many
years. For example, the closing price of the S&P 500 was only 1 point
different on November 29, 1968 and August 17, 1982, according to MSN. That
required nearly 14 years of patience!
Third, your patience may be
rewarded. Between August 17, 1982 and March 24, 2000, the S&P 500 rose
approximately 1,300%, according to data from Yahoo! Finance. That was nearly an
18-year payoff.
As you may already know, our
current three-month flat period in the stock market is just the tip of the
iceberg. Turning back the calendar, the S&P 500 closed at 1,105 on March
24, 1998, which is only 1 point higher than it closed at last Friday. This
means the U.S. stock market has essentially gone nowhere in nearly 12 years.
Ouch.
That
may sound ugly but there is an upside. Many stocks pay dividends so, on a
reinvested dividends basis, the return may look better over those 12 years. And,
of course, there's this thing called diversification.
Other asset classes such as foreign stocks, bonds, real estate, and others may
have provided a positive boost to an investor's portfolio over that period. In
summary, tune out the noise, be patient, and diversify.
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Data
as of 2/26/10
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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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-0.4%
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-1.0%
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50.3%
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-8.7%
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-1.7%
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-2.0%
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DJ
Global ex US (Foreign Stocks)
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0.3
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-4.6
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59.2
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-8.9
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1.8
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0.3
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10-year
Treasury Note (Yield Only)
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3.6
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N/A
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3.0
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4.6
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4.4
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6.4
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Gold
(per ounce)
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-0.4
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0.4
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18.3
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17.4
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20.5
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14.2
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DJ-UBS
Commodity Index
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-0.7
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-3.9
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25.4
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-8.3
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-3.1
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3.2
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DJ
Equity All REIT TR Index
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0.8
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-0.2
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92.5
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-14.6
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1.7
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11.2
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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.
IS
DEFLATION on
the horizon? With all the money being pumped into the worldwide economy and our
large state and federal deficits, many investors are preparing for a surge of inflation sometime down the road.
Logically, that makes sense--but is that what will really happen?
Yes,
the U.S. government has tried to pump, prime, and print its way to economic
growth, but that has its limits. This money has to find a productive use or
else it won't "stimulate." Here are a few things that are blocking
our stimulus money from stimulating the economy.
First,
banks have excess cash. Bank lending plays an important role in transforming
easy money into economic growth. Unfortunately, banks are sitting on nearly $1
trillion of excess reserves at the Federal Reserve, up from essentially zero in
the fall of 2008, according to data from the St. Louis Federal Reserve Bank.
This is $1 trillion above and beyond reserve requirements, which means banks
could use that money to lend to businesses and consumers instead of keeping it
safe and secure with the Fed.
Second,
the unemployment rate is near 10% and jobless claims are remaining stubbornly
high. It's hard for consumers to spend when they are out of a job or worried
about losing one.
Third,
consumers are de-leveraging and paying down debt. By paying off their bills,
consumers have less money to spend on goods and services. Less spending may
lead to less economic growth.
Fourth,
because of the deep recession, the U.S. has substantial excess capacity in its
industrial sector. According to the Federal Reserve, capacity utilization was
only 72.6% in January, which is well below the 1972-2009 average of 80.6%. With
all this slack, there may be little upward pressure on prices because factories
have room to add production.
Fifth,
a little followed economic indicator from the Dallas Federal Reserve Bank
called the Trimmed Mean Inflation Index (TMII) is declining. This is an alternative measure of inflation, which
adjusts for the month-to-month noise found in more popular inflation measures
like CPI. For the 12 months ending December 2009, the TMII (inflation rate) was
1.3%--the lowest rate on record dating back to 1978.
So,
while many people are talking about inflation, we also have to consider the
possibility that deflation could
happen first and then be followed by inflation down the road. It may not be a
high probability, but it is on our radar and could impact the markets if it
comes to fruition.
Weekly
Focus - Think About It
"Success
is simple. First, you decide what you want specifically; and second, you decide
you're willing to pay the price to make it happen, and then pay that
price."
--Nelson
Bunker Hunt
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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.
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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.
*
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.
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Securities Offered Through LPL Financial Member FINRA/SIPC
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