Luke (middle child) just finished his first basketball season a couple of weeks ago. During the games there was a flurry of activity up and down the court, but very little scoring. I find this analogous to the U.S. stock market this year. With all the (economic and political) headlines and announcements, three major U.S. stock indices (Dow Jones Industrials, S&P 500 and NASDAQ) are all just above breakeven as of the close of the market yesterday. Believe me, I truly enjoyed watching Luke play basketball and actually score. However, in the previous scenarios, it can be exciting and emotional at times, but in the end not much to record in the scorer’s column.
Separately, retailers said yesterday that store sales rose in February by the largest amount since November 2007. Also orders to U.S. factories in January posted their sharpest rise in four months. Overseas, both Greece and Spain had auctions for their respective countries five-year bonds and each was oversubscribed, with more buyers willing to buy more bonds than were put up for sale.
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Last week in the Wall Street Journal I read that several municipalities are considering filing for bankruptcy because they are cash strapped and can’t meet their bond payments. The following chart highlights the fact that from 1970 through 2008 (adjusted for inflation) U.S. government spending has risen 221% versus 32% for median household incomes.
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Instead of drawing from the latest headlines on the current state of the economy or stock market, I am providing some longer term perspectives from professionals whom I admire.
“Come 2010, only 16 cents of every dollar of global economic growth will come from the U.S., nearly half the level of 1980. While GDP is tied to the American consumer, S&P profits are boosted just as much by corporate spending and overseas growth.”
– Kopin Tan, Barron’s, December 19, 2009
“Advocates of the new normal cite the large U.S. indebtedness as one of the factors behind slow future growth. However, there’s a vast cache of unused purchasing power in the rapidly growing middle classes in emerging economies, especially India and China. These rising middle classes represent the largest untapped markets the world has ever known and will drive demand in the next decade. And they want quality goods and brand names that are produced by firms based in the U.S.”
– Jeremy J. Siegel, Kiplinger’s Personal Finance, December 2009
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Grease Greece is not the word!
Greece is a member of the European Union (EU) (i.e. an economic and political union of 27 European nations). Greece’s population and economy are both very small in comparison to the entire union of nations; however, it is having a dramatic impact on all EU nations.
Fears of the Greek government not being able to pay off its debts is rooted in the fact that this country has a history of out of control spending, and the inability to get its financial house in order. This has resulted in investors worldwide concerned that Greece can only meet its obligations via other EU nations bailing them out. Unfortunately, Germany, France and other EU members’ are struggling from the recession. As such, they are concerned that if they guarantee or take on Greece’s obligations, then other economically challenged EU members will consider doing the same.
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Commentary for the week ending February 5, 2010
Long-term vs. short-term
or
Patience and persistence vs. emotions and reaction
Do emotions affect our investment decisions? Yes! Ironically, we react differently to declining stock prices as compared to declining home values.
Almost everyone’s home has decreased in value over the last two years. However, we don’t receive monthly statements showing the decreased value. Also, it can be a cumbersome process to list our home, eventually sell it, and move, versus simply making a phone call or placing sell orders online. Most importantly, I’ve heard many clients state, “I would be crazy to sell my house in this environment.”
This same thought process may not transfer over to our investments. It is much easier to exert what we consider “control” in an emotional period by moving all or some of our investments to cash. It gives us sense of relief in the short-term and very little effort is needed when compared to the sale of a house.
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Both of the following trivia items were noted in today’s Wall Street Journal.
Currently, all three major U.S. stock indexes, the Dow, S&P 500 and NASDAQ have lost money year-to-date, and some believe a weak January bodes ill for stocks the rest of the year. According to Ned Davis Research, in years when the Dow has risen in January, the median rise for the rest of the year is 10.4%. In years when the Dow has fallen, the median rise for the next 11 months is just 0.28%. However, this predictor is not fool proof. Last year, the Dow, S&P 500 and NASDAQ were all down in January and all three indexes came roaring back to end the year with nice gains. Read more
As I am writing this, the market is down for its second day in a row. Historically, the market (i.e. a collection investor opinion) does not like the uncertainty surrounding government policy, interest rates, income taxes, the economy and the impact on corporate earnings.
As such, the market doesn’t voice its opinions at the voting booth; it voices it in the up or down movement of security prices. None of us wants to face making a major purchase (e.g. a new car) in the midst of company layoffs. As such, businesses don’t like making hiring, new equipment or other plans when faced with a shifting landscape. This uncertainty weighs heavily on analysts and ultimately investors, which results in them reducing their perceived value of company stocks (i.e., lower stock and bond prices).
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- Computer chip maker Intel reported a huge rebound in profits and sales for the last quarter of 2009. This is a good sign for technology related companies. Individuals and corporations are spending money on computers and related technology equipment and software. It is positive to see consumer and corporate confidence actually result in new purchases. Read more
- Data from the Purchasing-managers’ indexes of manufacturing activity showed that the U.S., Europe, Japan and China all saw a jump in manufacturing activity last month.
- The Labor Department noted that claims for first-time unemployment benefits barely rose last week, and the four-week average of claims fell for the 18th straight week. Read more
When asked what investors would learn from the current crisis, Jeremy Grantham (renowned institutional investor) remarked, “In the short term a lot. In the medium term a little. In the long term, nothing at all. That is the historical precedent.”
James Montier, Societe General, June 18, 2009
“As bad as the past decade has been, there have been other ten-year periods during which stocks have recorded even bigger losses. Yet over 20 years or longer, stocks have never lost money, even after inflation. Including the latest bear market, stock returns have averaged 7.80% per year over the past 20 years and 11% annually over the past 30 years.”
Jeremy Seigel, Kiplinger.com, July 23, 2009
“Those looking for the economic numbers to validate the market’s move or for corporate executives to express optimism about the outlook are likely to continue to be disappointed. Economic numbers report the past, and corporations observe the present, while the market lives for the future. Corporations always express the most optimism about the outlook at the top, and the most pessimism at the bottom. Markets are about expectations, and expectations are about the future are improving, on balance, and so are the markets.”
Bill Miller, 2nd Quarter Commentary, leggmason.com, July 19, 2009
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