One consequence of instant information and faster trading is that global markets increasingly tend to move as one. And last week, that move was a step back from risk.

U.S. stocks suffered their second pullback in three weeks. The loss measured just 1.3%, but more alarming was the deteriorating momentum: On Thursday, all four major stock indexes fell below their 50-day moving averages. For the Standard & Poor’s 500 Index and Nasdaq Composite, this turn came after a remarkably determined string of nearly 130 consecutive sessions when the indexes always managed to rise above their trend lines. Thursday’s selloff came even as the market’s threat du jour—higher oil prices—eased. Asian and European stocks also retreated last week, and even gold ended a five-week winning run.

Don’t look now, but the three best-performing sectors so far in March are utilities, consumer staples and health care. What might worry this already antsy herd? Tempting as it is to blame investors’ apprehension on oil, the market’s swoon also worsened after the European Central Bank signaled its intention to hike interest rates soon. Yields spiked on bonds issued by several southern European countries; Moody’s downgraded Spain’s credit rating, and Michael Darda, MKM Partners’ chief market strategist, said Europe’s monetary policy, already too tight, “is about to get even tighter, with potentially devastating consequences.” The ECB’s balance sheet is expanding at a sluggish 2.6% pace, compared to 10% when the euro was born, and concerns are rising that higher rates now could choke off the Continent’s fragile recovery and worsen its budget woes.

With the onset of spring and the arrival of daylight-savings time, traders looking ahead also smell an uneasy end to the current easy-money regime. The Federal Reserve had been buying Treasuries and mortgage securities to hold down interest rates, but that $600 billion program will end in June. Expecting Treasury yields to rise later this year, the world’s biggest bond fund, the Pimco Total Return Fund, has already pared its holding of U.S. government debt to zero for the first time in three years.

It doesn’t help that Japan, the second-largest foreign buyer of U.S. debt, might now sell a portion of its $1 trillion stash in U.S. bills to help fund reconstruction after its worst earthquake on record. “Undoubtedly, Japan’s appetite for Treasury purchases will wane,” says Jack Ablin, Harris Private Bank’s chief investment officer. And without more buying by the Fed, treasury yields will likely rise in the second half.

Higher borrowing costs don’t automatically derail stocks, and may even signal a booming economy. But they’re more problematic when coupled with a bigger energy bill. In January, when unleaded gasoline was just $3 a gallon, gas-station purchases made up just 10.3% of the retail tab. Pump prices are now rising, and “history suggests that when gas purchases make up more than 10% of retail sales, consumers are forced to make the tough choice” of cutting back on some discretionary spending, Ablin notes.

Still, few expect the global recovery to unravel just yet. Stocks rebounded 0.7% Friday, and are off just 2.9% from the Feb. 18 peak, a sign that investors are watching and waiting.

The market’s momentum change bears watching. Bespoke Investment Group examined prior instances going back to 1971 when indexes slipped below their 50-day averages after more than 100 days above it. True to its momentum-sensitive nature, the Nasdaq went on to losses averaging 3.8% after a week, 5.6% after a month, and 4.7% after three months. In contrast, the S&P steadied itself and eked out gains averaging 1.1% a week later, 1.9% after a month and 2.1% after six months, perhaps because bargain hunters in the face of risk tend to browse first among big, quality stocks.

After dipping below 12,000, the Dow Jones Industrial Average ended Friday at 12,044, down 125, or 1%, on the week. The Nasdaq fell 69, or 2.5%, to 2716, while the Russell 2000 declined 22, or 2.7%, to 803. And crude oil pulled back 3.1% (Source: Barrons Online).

Last week, US Stocks and Foreign stocks decreased. Bonds increased. During the last 12 months, U.S. STOCKS outperformed BONDS.

Returns through 3-11-2011	1-week	Y-T-D	1-Year	3-Years	5-Years	10-Years
Bonds- BarCap  Aggregate Index	.4	.6	5.2	5.9	6.0	5.6
US Stocks-Standard & Poor’s 500	-1.2	4.1	15.7	-3.3	-1.6	.9
Foreign Stocks- MS EAFE Developed Countries	-3.4	1.7	7.9	– 5.4	-.9	2.0

Source: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized excluding dividends.

“Those who make peaceful revolution impossible will make violent revolution inevitable.”

– John F. Kennedy while addressing Latin American diplomats at the White House on March 13, 1962

The show airs on WDIY Wednesday evenings, from 6-7 p.m. The show is hosted by Valley National’s Laurie Siebert CPA, CFP®. This week, Laurie welcomes guest Tom Riddle CPA, CFP who will discuss:

“What to do with that tax return now that you have it finished!”

Laurie and Tom will take your calls on this subject and other financial planning topics at 610-758-8810. WDIY is broadcast on FM 88.1 for reception in most of the Lehigh Valley; and, it is broadcast on FM 93.9 in the Easton/Phillipsburg area; and, it is broadcast on FM 93.7 in the Fogelsville/Macungie area – or listen to it online from anywhere on the internet. For more information, including how to listen to the show online, check the show’s website www.yourfinancialchoices.com and visit www.wdiy.org.

QUESTION: I own and run a closely held business and I purchase my health insurance under my own healthcare plan. My 25 year old daughter, who lives in Chicago, lost her job. Until she finds another job with health insurance, can I cover her in my healthcare plan and also deduct the cost of her coverage?

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ANSWER: Yes. Under the 2010 Reconciliation Act, a child under age 27 need not meet the dependency tests for coverage. Thus, your child is eligible for coverage (and you receive the deduction) regardless of your daughter’s abode, your daughter’s tax filing status, or who supplies support for your daughter.

Feel free to contact me if you or someone you know has this type of situation. Financial Planning and tax planning advice presented here is general in nature, and individual circumstances make applying these general rules tricky; thus, the above answer cannot be applied to all circumstances because the slightest variation could cause a different outcome.

 

Thanks to all of you who gave me your opinion of who serves the best cheeseburger and French fries for my once-a-year indulgence on St. Patrick’s Day. But, it’s a tied vote – the same number voted for Five Guys as for Emeril’s (at the Sands Casino). Let me know which you prefer. Just send me an email with your vote – and put “Cheeseburger in Paradise” as the subject.

This Wednesday I will be a guest on “Your Financial Choices” with host Laurie Siebert. I enjoy this opportunity to help educate listeners as part of my personal commitment to help not only those that come to us as clients but those in the general public. As always, I appreciate questions that listeners call and ask during the show.

Last week, more NEGATIVE than POSITIVE developments were announced and the stock market became more volatile.

Below is a succinct list of last week’s events:

Positives:
1) Payrolls reflect job growth, particularly in private sector
2) ISM mfr’g rises to highest since May ’04, ISM services at best since Aug ’05
3) Feb Vehicle sales total the most since Aug ’08
4) Bloomberg confidence (old ABC poll) holds at best since Apr ’08
5) ECB’s Trichet hinting at adherence to his sole mandate (Brazil raised rates by 50 bps).

Negatives:
1) Job growth still mediocre, Jan/Feb avg only 128k and 145k in private sector
2) Avg hourly earnings flat m/o/m as cost of living continues to rise
3) Beige Book says mfr’s and retailers start passing thru higher input costs
4) Gasoline prices rise another $.10, now $.30 in two weeks, Brent/WTI up another $3-5
5) 10 yr TIPS Inflation expectations rise 10 bps to 2.51%, the highest since July ’08
6) REAL spending in Jan fell .1%
7) Pending home sales weak/refi’s and purchases fall
8) Greek yields spike, Portuguese 10 yr remains above 7%.

Happy anniversary, bull market. Here’s a commemorative hat, a glass of bubbly and a slice of cake.

Now leave.

Wall Street is two years removed from the bottom of the current cycle, when the Dow Jones Industrial Average collapsed to less than 6500 in March 2009, and the Standard & Poor’s 500 traded at 675. The indexes have, of course, doubled since then. The Dow is above 12,000, the S&P north of 1300.

Yet it’s been a gradual, labored upward drift that recently led the equities market back to the level preceding the Bear Stearns collapse—less like grinding sausage, more like grinding coffee—day after day, until recently, of muted volume, dim volatility and less-than-urgent moves in market averages.

Not anymore. Investors who recently got used to putting money to work and effortlessly enjoying the profits– granted, they were counting coins, rather than big bills– seem to be over.

“I’m thinking the days of easy money are a fait accompli,” says Peter Green, long-time technical analyst and author of the Green Screen. He believes investors are discounting the end of the kind of easy money reflected in initiatives such as QE2 (the second round of second quantitative easing), which is slated to have run its course in June.

Certainly, the Federal Reserve’s policies have been intended to chase investors into riskier asset classes, such as equities rather than, for instance, Treasuries. But even as they were bidding stocks up 30% from the summer lows, investors and traders still clung to some havens, such as gold. Green points out those trades have fallen out of favor.

The SPDR Gold Shares exchange-traded fund (ticker: GLD), up 20% since the market bottomed in summer, has backed off by about 2% over the last couple of sessions, suggesting, in Green’s view, a loss of broad-market momentum. Investors seem to be losing some confidence in the capital markets, as a whole, and evidencing something bordering on alarm, rather than the previous complacency.

THE SLUGGISHNESS EVIDENCED by the equities market in the first two months of 2011—characterized by tame volatility, low volume and modest moves in indexes, as investors acclimated to a gentle economic recovery—has turned suddenly into a vicious cycle. The action of the Dow, which finished the week three-tenths of a percent higher, has begun, compared with previous trading, to look savage.

In seven of the past nine trading sessions, the industrial average has posted a triple-digit move. (That included Thursday’s near-200-point gain, its biggest bulge in three months.) There had been only seven such changes, on a closing basis, in the first two months of the year, according to Dow Jones statistics.

“Investors have to be worried about how bullish everyone has become,” says Brian Belski, chief investment strategist at Oppenheimer. “Investors have been trying to justify higher stock prices.”

Belski isn’t fatally bearish—far from it. But he’s looking for more fundamental catalysts to lead multiples higher. And investors aren’t necessarily getting those, as evidenced by Friday’s report on February’s nonfarm payrolls. Certainly, job growth swelled in the month, by 192,000. The unemployment rate ticked below 9% for the first time in two years—signs that things are moving in the right direction. But after the disappointing January payroll reading last month, investors secretly pined for a jobs-growth total of as much as 300,000. So the data came as a disappointment, versus the so-called “whisper” numbers.

Belski, who believes that stocks lead the economy—instead of the other way around—said that while U.S. stocks are “the asset class for the next three years,” 2011 might be more of a transition period, as the economy finds its footing. If the market has seen the highs for the cycle, they’ve got some gains to cherish. Since the August lows, the Wilshire 5000—basically a proxy for the whole market, on a dollar-for-dollar basis—has risen $3.5 trillion. For calendar 2011, it’s up nearly 5%, or $800 billion.

INVESTORS HAVE SLUMPED into profit-taking mode. Shares of Nvidia (NVDA), the developer of graphics-processing technology, have the distinction of being both among the biggest winners this year—up by more than 35%—as well as one of this week’s biggest losers, down 10% for the period. That’s evidence of some penchant to take profits where they’ve available.

Still, these are less-than-fatal circumstances for equity investors. According to the American Association of Individual Investors, a key barometer of investor sentiment, investors have allocated 63% of their capital to stocks or stock mutual funds, which is slightly more than historic averages.

More tellingly, investments in bonds and bond funds, which soared during the recession, sank to just 17%, the lowest reading from the AAII since August 2009.

Certainly, investors aren’t unmindful of geopolitical developments, especially those in the Middle East. The turmoil in Libya, and the attendant unease about the prospects of a contagion in the region, has pushed oil prices to more than $104 a barrel in the U.S., including Friday’s 2.5% bulge. There are some—us included—who would argue that inflation pressures won’t be a problem until somebody in the American workforce has gotten a raise. (Have you?) The labor reading Friday hints that that’s far off.

Rising energy prices have a push-pull impact on the market. Among the biggest winners last week were Marathon Oil (MOR), up 8%, coal producer Peabody Energy (BTU), higher by 6%, and coal and natural-gas producer CONSOL Energy (CNX), ahead 6%. But higher prices at the pump are regarded as the equivalent of a tax on the consumer (Source: Barrons Online).

Last week, more POSITIVE than NEGATIVE developments were announced but the stock market dropped, instead of rising. Something else affected the economic outlook and that was the price of OIL.

HERE IS WHAT CONCERNS THE STOCK MARKET: If oil were to remain between $90 and $100 this year, a roughly 20% markup from 2010 levels, overall economic growth could decline by 0.8 of a percentage point, estimates Vadim Zlotnikov, chief market strategist at AllianceBernstein. But growth in big-ticket spending is more sensitive to oil prices and could fall 5%. The U.S. economy can probably handle higher gas prices or higher mortgage rates—but not both, says Strategas Research economist Don Rissmiller. His rough rule of thumb: Risks of a downturn increase when the numerical sum of gasoline prices (currently below $4) and mortgage rates (approaching 5%) exceeds 10.