Greetings!
Here is your newsletter for May 2010, including a market update, some words about consumer confidence, and an update on the Greek debt situation.
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April Market Update
Several positive economic reports came out last week which provided some counter-balance to the performance of the stock market, which had it's first losing week in two months, although the S&P 500 gained 1.5% for the month and is up 6.4% year-to-date through the end of April.
The Commerce Department reported that household purchases increased at a better-than-forecast 3.6 percent annual rate in the first quarter, as the economy expanded at a 3.2 percent pace from January through March after growing 5.6 percent in the final three months of 2009.
The report also showed that U.S. retail sales climbed 1.6 percent in March (the most in four months) while consumer spending (which accounts for about 70 percent of the economy) rose in the first quarter at the fastest pace in three years. Additionally, the Institute for Supply Management reported that business activity rose from 58.8% to 63.8% in April to it's highest level in five years. The Conference Board Consumer Confidence Index, which had rebounded in March, increased further in April and is at it's highest level since September of 2008. The index now stands at 57.9%, up from 52.3 last month. "Consumer confidence is recovering very, very gradually," Julia Coronado, a senior U.S. economist at BNP Paribas in New York said before the report. "There is a lot of bouncing around, but we are on an upward trend. Consumers are starting to feel a little more optimistic and we're seeing that the spending backdrop is a little better."
Meanwhile, Federal Reserve policy makers last week said in their statement after leaving the benchmark interest rate near zero that although "spending is constrained" by high unemployment, "economic activity has continued to strengthen."
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The Consumer Confidence Correlation
In last month's newsletter I wrote about a subject that has been on the mind of many investors, and which has been amplified by financial journalism: the coming market correction.
Given the 75% increase (as of the end of April) in the S&P 500 since March of 2009, it would be reasonable to expect a correction, and in fact the S&P 500 did lose 8% between January 19 and February 8, although this would not be considered a correction according to the classic definition. (A 10% adjustment.)
In any case, since the February 8 low, the market has climbed above it's January 19 closing value. And as Milestone clients are aware, market corrections are to be expected, having historically been necessary (or at least predictable) ingredients for the continuing rise of the equity markets.
The chart below, from a recent column by Floyd Norris of the New York Times, illustrates the eight episodes since 1968 in which equities have risen more than 35%, and the level of consumer confidence (as assessed by the Conference Board) near the end of each of these advances.
While it is true that consumer confidence may not be a perfect indicator of investor sentiment, neither would it be a bad proxy for it.
 Interestingly, the CC level as of March 5, 2010 is the lowest, yet the market increase is the highest.
Depending on how one looks at this, it could either be taken as a sign that the markets will indeed correct and correct soon, or perhaps simply that the percentage increase is mainly a product of the preceding market decline.
In Summation
In any case, since it is not possible for any of us to successfully exploit information as to the direction of the markets, long term investors (such as we are) with lifetime portfolios (such as we have) that correlate to their individual circumstances (such as they do) can take comfort in the knowledge that a transactional reaction is not needed in response to something that has not happened yet, and which if it did could not be reliably predicted anyway. | |
The Situation in Greece
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 The Greece debt crisis arrived at its inevitable first pivot point on Tuesday when the Greek government formally asked for a bailout from the European Union and the International Monetary Fund. The impact was meaningful around the globe as stock markets were hard hit and Greek interest rates spiked to shocking levels.
The ramifications of this crisis derive not from Greece (which is only 2% of the European economy) but from the dangers of the next shoe to drop, wherever and whenever that may be.
The current problems in Europe are not unlike the housing crisis experienced in the United States, wherein, mistakenly, "financial experts" believed that the weakness would be contained to sub-prime mortgages only. As the crisis spread, the housing market collapsed and the financial system was brought to its knees. When Greece's debt was downgraded to junk status, it was merely a confirmation of a reality that the markets had already determined.
The European Central Bank's Axel Weber commented that a default by Greece would result in "incalculable" consequences. He may be right. However, the EU and the IMF may not be able to backstop all of Europe's potential needs without significant political and economic difficulty; a spreading of sovereign debt woes beyond Greece could slow the European economy at best and reverse it at worst.
Either way, it is a crisis which may become increasingly problematic for the European Union, its trading partners, and perhaps the health of the global recovery.
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Milestone Financial Advisors, LLC
Ten Key Portfolio Considerations: |
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- Reduce Expenses
- Diversify Systematically
- Seek to Reduce Taxes
- Think Long Term
- Maintain Discipline
- Maintain Prudent Cash Reserve
- Own Low Cost Funds
- Maintain Asset Allocation
- Add to Portfolio Systematically
- Connect Goals to Investments
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