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Market Commentary
Economic Updates
Recent News |
Weekly Commentary
July 12, 2010
The Markets
Wall
Street investors are sure a fickle crowd these days.
After
dropping 16% between April 23 and July 2, the S&P 500 recouped one-third of
that loss last week and rose 5.4%, according to Bloomberg, July 10. Stocks rose
on news that U.S. retail sales grew at the fastest pace in four years in June and
a bullish report from the IMF projected an upwardly revised global economic
growth rate of 4.6% in 2010, according to CNBC, July 8. Rising optimism that
second quarter earnings reports might be better than expected also supported
stock prices last week, according to MarketWatch, July 7.
Although
the market jumped dramatically, has much changed in the past week? Maybe, maybe
not.
Wall
Street observers have a tidy tendency to explain every movement in the market
with an explanation that seems, on the surface, to be reasonable. Last week's
bullish reports on retail sales, world economic growth, and some earnings
pre-announcements all seem like logical explanations for the big rise in the
market. However, between April 23 and July 2, when the market dropped 16%, we
were reading reports that retail sales were weak, economic growth was slowing,
and we might be heading for a double-dip recession. Now, a week later, the economy
seems to have turned a corner, right?
In
reality, the truth is probably somewhere in between. The economy may not have
been as bad as the 16% market swoon suggested and it may not be as good as last
week's 5.4% pop suggests, either.
It's good
to know what market observers are ascribing to the market's weekly moves, but
as financial advisors, we have to filter their tidy explanations with a dose of
skepticism.
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Data as of
7/9/10
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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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5.4%
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-3.3%
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22.6%
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-11.1%
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-2.4%
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-3.1%
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DJ Global ex US
(Foreign Stocks)
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4.7
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-7.1
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18.2
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-12.2
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2.0
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0.3
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10-year
Treasury Note (Yield Only)
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3.1
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N/A
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3.4
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5.2
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4.1
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6.0
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Gold (per ounce)
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0.6
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9.5
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32.6
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22.3
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23.3
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15.6
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DJ-UBS
Commodity Index
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2.4
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-8.8
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10.6
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-9.6
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-4.3
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2.3
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DJ Equity All
REIT TR Index
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5.5
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8.7
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72.3
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-9.0
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0.0
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10.1
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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.
DOES THE LARGE U.S. BUDGET DEFICIT
MATTER? Below is
a chart of our annual budget surplus/deficit for the past few years.
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Year
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U.S.
Surplus/(Deficit) in billions
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1998
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$69
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1999
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126
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2000
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236
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2001
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128
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2002
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(158)
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2003
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(378)
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2004
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(413)
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2005
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(318)
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2006
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(248)
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2007
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(161)
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2008
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(459)
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2009
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(1,412)
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2010
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(1,500)
(projected)
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Notice
how our budget deficit has soared over the past three years as the recession
took its toll. Surprisingly, it was just nine years ago that we ran a budget surplus
of $128 billion. On a cumulative basis, the national debt is $13.2 trillion,
according to the Treasury Department. So, should we be concerned that our
annual deficit and national debt are rising dramatically?
Without
meaning to be glib, deficits don't matter until they do. Just ask Greece.
Currently,
financial markets are relatively unconcerned about our debt level. Investors'
lack of concern shows up in the fact that interest rates on government bonds
are near historic lows and the spread between interest rates on
inflation-protected Treasury bonds and regular bonds is a mild 2.3%, according
to MSN, July 9. If investors were concerned about our debt level, they'd send
interest rates skyrocketing (as happened in Greece) and inflation might rear
its head if the government cranked up the printing press to monetize our debt.
Investors
are not alarmed at our large debt level because they still have confidence that our country will weather
the storm. However, investors could lose confidence if, for example, we
experience some new shock or a "failed" Treasury auction. If that happens,
confidence could dissipate rather quickly and throw our economy into disarray.
Nobody
knows if this will happen or not, but we continue to monitor interest rates and
inflation expectations as early indicators to help determine if confidence is
slipping.
Weekly Focus - Think
About It
"Our
ordinary mind always tries to persuade us that we are nothing but acorns and
that our greatest happiness will be to become bigger, fatter, shinier acorns;
but that is of interest only to pigs. Our faith gives us knowledge of something
better: that we can become oak trees."
--E.F.
Schumacher
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Warm 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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