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Market Commentary
Economic Updates
Recent News |
Weekly
Commentary
May 3,
2010
The Markets
Two tragedies, worlds apart, reached a boil last
week and affected the financial markets in a not so pleasant way.
Greece, which is an ocean away and no stranger to
tragedy, (think Aeschylus, Sophocles, and Euripides), nearly imploded last week
on fears that its government was bankrupt. With huge budget deficits and no
credible way to pay them, Greece saw its short-term government bond yields soar
past 20%, according to Barron's. By contrast, the comparable bond in the U.S.
yielded about 1% last week, according to the Treasury Department. As a euro
country, Greece has limited tools to deal with the crisis on its own (e.g., it
cannot devalue its currency or adjust its interest rates) so it has to rely on
the kindness of neighbors to bail it out. This past weekend, the European Union
and the International Monetary Fund announced that they will support Greece
with a $146 billion multi-year aid package, according to Bloomberg. Now comes
the hard part for Greece--implementing the austerity measures that accompany
the bailout.
The concern that this debt problem could spread
and undermine the euro countries helped undercut many world stock markets last
week.
Closer to home, the uncapped oil leak in the Gulf
of Mexico has states bordering the Gulf bracing for an environmental and
economic disaster. The Gulf is a major oil-producing region and this spill
could deter new drilling, a thought which helped send oil prices up more than
1% last week. Unfortunately, fishermen, the tourism industry, and the
environment itself all stand to lose, too, as the spill worsens.
While the twin tragedies captured many of the
headlines last week, much of the economic news was bullish. For example, first
quarter gross domestic product grew at a respectable 3.2 percent annual rate,
household spending increased at the fastest rate in three years, and The
Institute for Supply Management-Chicago Inc. said its business barometer rose
to 63.8 in April, the highest level in five years, according to Barron's. On
top of that, The Economist magazine
said, "global output is now back to where it was before the downturn...(and)
there is growing optimism that the recovery is becoming self-sustaining."
Although the twin tragedies are still developing,
recent solid economic news has helped limit their financial market impact.
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Data as of 4/30/10
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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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-2.5%
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6.4%
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35.2%
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-7.1%
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0.4%
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-2.1%
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DJ Global ex US (Foreign Stocks)
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-1.4
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1.0
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39.5
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-8.1
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4.2
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1.3
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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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3.1
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4.6
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4.2
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6.3
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Gold (per ounce)
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3.5
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6.8
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33.5
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20.3
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22.0
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15.7
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DJ-UBS Commodity Index
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-1.0
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-3.2
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21.8
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-8.0
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-2.5
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3.2
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DJ Equity All REIT TR Index
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-1.2
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17.5
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68.6
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-8.4
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4.3
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11.6
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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.
"EVEN
AFTER THE BIGGEST RALLY SINCE THE 1930s, U.S. stocks remain the
cheapest in two decades as the economy improves," according to an April 26
Bloomberg story. How can that be? Well, digging into the numbers a bit, it
appears the statement comes with some qualifiers. First, the
"cheapness" is based on the price to earnings ratio (P/E) using forecasted earnings estimates. By that
measure, the S&P 500 is trading at 14.1 times forecasted earnings. As you
know, forecasts may or may not come true so, if earnings actually fall short of
the projection, then today's P/E will be higher in retrospect.
Second, while the Bloomberg headline said stocks
were the cheapest since 1990 based on analyst estimates, the article qualified
that and said, "except for the months after Lehman Brothers Holdings Inc.
collapsed." So, yes, stocks may be cheap now, but they have been cheaper
in the recent past.
But wait, in the same article, Bloomberg points
to another market valuation measure that says the market is significantly overvalued. Using the 10-year average
corporate earnings model popularized by Yale economist Robert J. Shiller, the
P/E on the S&P 500 is currently about 22, which is well above the
historical average of 16.
Bulls will point to the P/E using forecasted
earnings estimates and say stocks are cheap. Bears will point to the Shiller
calculation and say stocks are dear. Regardless of which view is ultimately
correct, we stay focused on helping you reach your goals and your
objectives for the future.
Weekly Focus - A Riddle
Two fathers and two sons went fishing one day.
They were there the whole day and only caught three fish. One father said, that
is enough for all of us, we will have one each.
How can this be possible?
(See the answer
below)
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Answer to the Riddle: There was
the father, his son, and his son's son. This equals two fathers and two sons.
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Celebrate Your Mother
This year, instead of celebrating Mother's Day, show your
appreciation by celebrating Mother's Week. Every day - from May 3 through May 9
- say or do one thing that will let your mother know how much you appreciate her.
Here are a few ways you can make Mom feel like a million bucks:
Drop
off a different flower every day with a note of gratitude for something
she did for you. On Mother's Day, give her a bouquet or flowering plant
for her garden.
If she
lives in another city, send your mom a card each day with a message of
appreciation for something she did for you. On Mother's Day, send a cake
or a bottle of champagne.
Each
day send a letter, with pictures, that describes your memories of a
specific event. You can enlist the help of friends and family members. On
Mother's Day, give her a scrapbook to hold the letters.
Give some thought to the ways in which your Mom has helped
you become the person you are, and then decide how to show your appreciation.
In the meantime, let us celebrate you! We think you are great!
We appreciate your business and will work hard to earn the trust and confidence
you have placed in us.
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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.
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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.
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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.
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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.
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You cannot invest directly in an index.
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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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