Back to the Future

Generally speaking, most Octobers are not that much different from other months, but three October market disasters give this month a scary history. The market crash on October 29, 1929 brought us the beginning of the Great Depression. We recently marked the 25th anniversary of the October 19, 1987 crash when the market lost 22.6 percent of its value in one trading day. If memories of these events were fading, the markets gave us October, 2008 and the S&P 500 was down 27 percent at one point during the month.

The October, 2012 market surprise came from the sky as hurricane Sandy shut down U.S. equity trading for two consecutive days. Historians had to go back to 1888 to find the last time weather caused a two-day stock market shutdown. The economic impact from this devastating storm will be felt well into 2013 as the clean-up, rebuilding and renovation processes begin. Stay tuned as economists try to measure the future economic influence from this storm.

After four presidential debates and the storm of the century, the markets once again survived another frightening October. Let’s take a look at the market results. The U.S. equity market, as measured by the S&P 500, had its third down month in 2012 declining by 1.85 percent, but is still up an impressive 14.29 percent this year. In addition to the S&P 500, other major indices also showed moderate monthly declines. The NASDAQ was down 4.07 percent, the Dow Jones Industrial Average declined 2.39 percent and commodities had a rough month losing 3.87 percent of its value. On the positive side, international stocks posted a small gain climbing 0.83 percent and closed the return differential versus the S&P 500 with an 11.00 percent year-to-date return. While there are economic and political clouds on the horizon, stocks represent one of the best relative value investment opportunities.

Interest rates remain suspended at these exceptionally low yields for another month. The credit sectors continue to outpace the government sectors as investors stretch for incremental yield by buying debt backed by corporate or mortgage-backed securities. During October the fixed income results were: high yield +0.83%, corporate/mortgage investment grade +0.43%, and U.S. Government -0.15%. Looking ahead to next year, keep your fixed income return expectations in line with the current coupon levels. Most of the capital appreciation in bonds is now in the rearview mirror.

With year-end only two short months away, many investors are transfixed on the unknown. You know the topics: who will win the election, which party will control congress, what does the looming fiscal cliff mean for the markets, have corporate earnings peaked, will housing rebound, will there be changes at the Federal Reserve, what impact from the European sovereign bank crisis, and what about the political tensions in the Middle East? Turbulent markets illicit strong emotions among investors often causing them to buy high and sell low. This time is not different, but it is critical to look beyond today’s headlines and focus on the long-term opportunities available in these markets.

Our goal at Nevada Retirement Planners is to provide your financial plan with a non-emotional long-term perspective aimed at keeping you properly invested throughout the various market and news cycles. Long-term growth and wealth creation requires vision, patience and a commitment to your financial plan. Stay your course and you will be rewarded.

Posted on November 1, 2012 Read More

Third Quarter Review – Climbing a Wall of Worry

The Federal Reserve has given the market four clear buying signals dating back to November, 2008 and we know these as Quantitative Easing 1 (QE1), QE2, Operation Twist, and the newest QE3 announced in the third quarter of 2012. The new and improved QE has the Federal Reserve buying an additional $40 billion per month of Agency mortgage-backed securities and they signaled low short-term interest rates into 2015. The stock market has responded to each Fed move with higher equity prices.

The S&P 500 gained 6.35 percent for the quarter and lifted its year to date return to an attractive 16.44 percent. Even international stocks as measured by the MSCI EAFE Index were up by 6.92 percent in the quarter, but they still lag the S&P 500 with a 10.08 percent return since January 1. The individual strength of Apple Computer carried the NASDAQ Index to a quarterly return of 6.50 percent and a 20.65 percent YTD return.

Despite historically low interest rates, the fixed income asset class remains steady. The Barclays U.S Aggregate Bond Index gained 1.58 percent for the quarter and is up 3.99 percent so far this year. For the quarter and the year-to-date period, the credit sectors are outperforming the Treasury sectors as credit spreads continue to tighten while interest raise remained basically unchanged. Strength in the equity market translated into strength in the high yield sector. As the bond market’s top performer, high yield returned 4.53 percent for the quarter and 12.13 percent for the year to date period.

As we enter the fourth quarter investors are staring at a huge wall of worry. The market concerns are endless as investors fret over the: European debt crisis, U.S. debt burdens, looming fiscal cliff, housing woes, high unemployment rates, slower GDP growth, political uncertainties, and the presidential election. With all the looming global uncertainty it is easy to take a low or no risk approach to the markets and your financial plan. With so many investors fearful of the environment now is likely the best time to invest at the appropriate risk level of your long-term plan. One investment saying recommends, “Don’t fight the Fed”. The Federal Reserve right now is participating in the financial markets in a big way and it will likely be more profitable to join them versus fighting them.

At Gradient Investments, we believe your best long-term solution is to stay invested for the long-term at highest risk level your situation can tolerate. At the end of the day, your wealth will be determined by your time in the market, not by your efforts to time the markets.

Posted on October 8, 2012 Read More

Is The Fed Ready To Act?

There was a degree of uncertainty as to what he would recommend because of all the cross-currents out there in the economy and the investment markets. Essentially the markets were debating if Bernanke would endorse more economic stimulus or not. Below are the arguments for either:

– Additional stimulus is necessary because domestic economic data has softened recently, unemployment is too high and so far the stimulus has not caused an inflation problem

– Additional stimulus is not needed because the economy is still growing (albeit more slowly), “Operation Twist” stimulus is still in place and the stock and bond markets are doing well.

In his speech he gave us a bit of both. Bernanke did not endorse immediate actions to spur the economy in the form of new QE3 (quantitative easing part 3). But he did say the economic recovery is far from satisfactory and the unemployment situation is a “grave concern”. Bernanke also reiterated that he believes in stimulus policy to spur the economy when it is needed. Bottom-line, no stimulus was offered up last week, but there is a strong indication that if the economy does not improve soon some form of central bank stimulus is coming.

Remember, the markets have reacted positively towards Fed stimulus in the past. The Federal Reserve has two objectives, stable economic growth and controlled inflation. Watch the employment numbers coming out this Friday, if they’re weak the argument could become stronger to apply additional fiscal stimulus. There is an FOMC meeting September 12th where Bernanke could further enlighten us on his plans, stay tuned.

Speaking of central bank stimulus, we should keep our eye on what the European Central Bank (ECB) is planning. There is an ECB meeting September 6th and Mario Draghi (ECB President) has been posturing for Europe’s own brand of fiscal stimulus to jumpstart the flagging Eurozone economies. Watch the trend of the chart below, it highlights the 10 year Spanish bond yields and is a great indicator of investor faith in the Eurozone. If rates begin to fall for this troubled country this implies investor confidence in Europe is increasing.

Posted on September 4, 2012 Read More

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