Paper Bull

November was another stellar month for both the stock and bond markets. For two weeks in early October it looked like the long awaited market correction was finally upon us. The eight to ten percent price declines were quickly erased and by the time November began the markets were back on their bullish trajectory. When historians analyze returns of the S&P 500, this run will be a bull market by any definition. Although it’s a bull market on paper, it’s been a bear market waiting to happen in the hearts and minds of many investors.

This bull market sprouted from the ashes of the 2008 financial crisis. Many investors lost trust in Wall Street, corporate America, the government and the markets themselves. While the negative noise from the media was overwhelming, the market quietly began to notice economic improvements which translated into higher stock prices. Prices rose due to confident consumers, profitable growing companies with reasonable valuations, low inflation, low interest rates, higher productivity, and ever expanding technology. These factors are likely to propel the market higher in the quarters and years ahead but there will be corrections along the way. If we compare this bull market to past ones there is still plenty of time and room for price appreciation and long term wealth creation.

November’s stock market results had similar themes to previous months. The U.S. outperformed international and smaller companies outperformed larger companies. NASDAQ, on the strength of Apple Computer and other technology companies, lead the way with a 3.66 percent return for the month. The Dow Jones Industrial Average and the S & P 500 were close behind with a respectable 2.69 and 2.86 percent return. Major international equity indices were slightly negative for the month leaving them barely positive over the trailing twelve months.

In bond land, interest rates traded in a very tight trading range for most of the month until the strong dollar and weak oil prices provided a small bond rally into month end. The 10-year U.S. Treasury broke through 2.20 percent once again heading toward that magical 2.00 percent yield. The high yield sector of the bond market was subject to additional credit spread widening as investors demanded a higher premium for debt rated below investment grade. High yield spreads are widening from historical tight levels, so the move here to wider spreads and lower prices is both rational and welcome for longer term bond valuations.

Coming off the October scare, it’s important to remind ourselves market timing is a loser’s game. We cannot tell where the market will be at the end of this year or next, but we can say with certainty the stock market creates wealth over long periods of time. The bond market generates income, albeit a small in today’s world, and can balance the risk of stock ownership. Together in the right proportions a portfolio can be built to properly manage risk and keep investor’s invested. The adage, “It’s time in the market, not timing the market”, provides great investment advice. The key to financial success is finding your own personal balance point that keeps you invested throughout the various market cycles. Discuss your personal financial situation with your independent advisor to design a personalized balanced portfolio, then, let it grow.

Posted on December 15, 2014 Read More

Shock and Awe

The stock market along with the full force of the financial media rendered its version of shock and awe on unwitting investors; paralyzing some and forcing others into an early surrender. We strive to keep our independent advisors and their clients informed and provide non-emotional clarity to the news and events that matter. October proved to be a stern test of investor resolve as volatility spiked and stock prices fell quickly, only to rally back with vengeance.

Let’s put October into perspective. The stock market has been rallying for over five years and the rally will likely continue given the corporate earnings expectations and current price earnings multiples. Stock markets do not go straight up, although the past two years is as close as we can get to nirvana.

The stock market corrects within every year and over the long haul it averages 2.6 positive calendar years for every one year negative. This is great news for the patient long-term investor as the odds are in your favor if you stay in the game. The October intra-month correction stemmed from a handful of factors converging on the market in early October. There was anticipation of third quarter corporate earnings releases, a European economic slowdown or possible recession, EBOLA concerns, terrorist activity, Euro dollar weakness versus U.S. dollar strength, falling oil prices, the U.S. Federal Reserve ending quantitative easing and nervous investors hiding in the shadows of 2008.

The monthly numbers hid the daily thrill ride, but when the dust settled markets were little changed in October. On the relative strength of the U.S. economy, U.S. equities once again outperformed international stocks. For the month, the NASDAQ, S&P 500, and the Dow Jones Industrial Average had positive results of 3.09, 2.44 and 2.16 percent respectively. International results were mixed with the MSCI EAFE down -1.45 percent and the MSCI Emerging Markets up 1.18 percent for the month. Commodities prices fell during the month as oil declined by another $10 per barrel and gold declined on the firm U.S. dollar.

Like stock prices, interest rates had a wild ride of their own during the month, and ended October with lower U.S. Treasury rates. Five, ten and thirty year Treasury rates fell by 16, 17, and 14 basis points to yield 1.62, 2.35 and 3.07 percent respectively. During the height of the October equity market panic, the 10-year U.S. Treasury hit a monthly low yield of 1.85%. This flight to quality move was swift and rates immediately reversed course back above the two percent level. Lower interest rates across the yield curve helped produced a 0.98 percent monthly total return in the Barclays Aggregate Bond Index. All in all, bonds have been remarkably stable in 2014 and we expect this to continue into 2015.

Markets can move quickly, but remember portfolios are constructed to meet your financial goals which are long-term goals. Your investment time horizon should be a long-term one to match the duration of your goals. Results should be measured in years or multi-year time frames. The emotional struggle comes from focusing on market noise which forces the unwitting investor to measure results in days and weeks. Breakaway from the herd, become a long-term investor and begin thinking in years, not days.

Posted on November 6, 2014 Read More

Third Quarter Review

Third Quarter Review

Equities reached record breaking levels on multiple occasions for both the S&P 500 and the Dow Jones Industrial Average in the third quarter. The climb to these new highs was accompanied with some modest corrections. In August, the market experienced a three percent pullback from the July high and September had a three percent pullback from the September high. While the media hypes each down day as the coming of the next bear market, the market has had other ideas.

The strength of the financial markets is derived from solid fundamentals. From a macro viewpoint, data suggests the U.S. economy is stable and excepted to grow near three percent well into 2015. Emerging market economic growth is running a few percent ahead of the U.S. while Europe is a few percent points below our domestic growth rate. Modest growth with low inflation gives companies a stable backdrop for operating their business. This is evident in the expansion of corporate earnings over the past five years. It is not a coincidence that both the S&P 500 price and earnings are at record levels. These two charts of S&P 500 earnings best explain today’s stock prices.

Future earnings will drive future stock prices. Third quarter earnings and future earning guidance released in October and November will determine the trajectory and direction of future stock prices. We will monitor these earnings results closely in the coming months.

In the third quarter stock returns were generally flat. U.S. equities outperformed international stocks again and market volatility increased as the third quarter wound down. For the quarter, the NASDAQ, Dow Jones Industrial Average and the S&P 500 had positive results of 2.24, 1.87 and 1.13 percent respectively. The major international indices of MSCI EAFE and MSCI Emerging Markets had negative quarterly returns of -5.88 and -3.49 percent. Commodities were crushed during the quarter as many of the major commodities trade in U.S. dollars and the U.S. dollar strengthened against other currencies. Gold was down- 7.84 percent and oil price approached $90 a barrel at quarter end. Gasoline prices below $3.00 a gallon could give the U.S. economy a boost in the fourth quarter.

Interest rates remain in a very tight trading range despite the Federal Reserve winding down their latest Quantitative Easing program and telling the market to expect their five year zero interest rate policy to end sometime in 2015. The chart below, although it appears to show just one line, depicts the U.S. Treasury yield curve at June 30, 2014 and September 30, 2014. If you look closely, interest rates beyond ten years to maturity decreased ever so slightly and interest rates between one and ten years were fractionally higher.

Changes in interest rates directly affect bond prices. The relationship is an inverse one, so as interest rates move lower, bond prices move higher. The opposite is also true. U.S. Treasury Notes and Bonds are only affected by changes to the U.S. Treasury yield curve. Lower long term interest rates in the third quarter produced a 2.69 percent total return in the Barclays Long Term U.S. Treasury Index and the Barclays Intermediate U.S. was up a mere 0.02 percent during the quarter. For the credit sectors of the bond market including: mortgaged-backed securities, investment grade corporate bonds, and high yield corporate bonds; their prices are affected by both changes in Treasury interest rates and changes in credit spreads. Higher credit spread in both high yield and investment grade corporate bonds caused these sectors to be down -1.87 and -0.08 percent during the quarter. All in all, bonds have been remarkably stable in 2014 and we expect this to continue into 2015.

The fourth quarter will serve to set up the 2015 markets. Earnings momentum and continued economic growth are crucial to keep the ball moving forward. The naysayers are pointing to the October end of Quantitative Easing, increased geopolitical risk, a European recession, and future Fed rate hikes as reasons for the stock market to correct. We recognize the stock market is closer to full valuation and future earnings growth is needed to support current levels. We believe in the leadership and relative strength of U.S. companies and the economies in which they operate and remain positive over the long term. The fourth quarter will have some hurdles to clear, so don’t let any short term volatility derail your long term financial plan.

Posted on October 13, 2014 Read More

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