Daily Archives: February 9, 2015

Heads Up!

Posted on by

The Equity Risk Premium

The equity risk premium describes the excess return that stock holders are rewarded with over a risk-free rate. The reason for this is pretty straight forward; In the event of a bankruptcy, stock holders are last in line to recoup any of their money and thus require extra return commensurate with the additional risk.

However just because there is a premium for holding stocks does not mean that it shows up every day, month, year or even decade. There can be long, excruciating periods of time where it feels like whatever the rewards might be just aren’t worth it.

Consider an investor who first bought stocks in 1930 and held on expecting to be compensated for the risk he was incurring. That investor would have seen his $100 investment shrink to $24 over the next thirty months. It would have taken him almost eight years to be made whole again, at which point his investment would get cut in half over the next year. Oof.

It would be understandable if that investor was ready to call it quits on stocks for the rest of his life after spending 96% of the previous decade losing money.

Needless to say, that would not have been a wise decision as he would have missed out on the 140% gains delivered over the following ten years.

2000-2009 was similar in terms of lousy, frustrating performance. An investor lost money 92% of the time and saw two separate vicious bear markets. It’s hardly surprising that people who are anchored to these events have been kicking and screaming as markets move on without them.

Will investors be rewarded for suffering through a lousy decade this time around? That’s the million dollar question.

Source: (The Irrelevant Investor)

The Economy

Posted on by

Last week the positive economic news exceeded the negative. Here is a recap:

Positives:

  1. January Nonfarm Payrolls came in at an increase of 257k vs 228k expected.
  2. Eurozone retail sales were up 2.8% in December, the strongest in almost 8 years.
  3. Average hourly earnings in the U.S. grew at 2.2% vs 1.9% expected.
  4. Eurozone growth came in at 52.6, a six-month high.
  5. Big revisions to the previous six months added another 102k jobs.
  6. Oil stopped crashing, it finished the week up 8.5%.

Negatives:

  1. January unemployment ticked up a bit to 5.7% from 5.6%.
  2. Interest rate sensitive Utilities got roughed up on Friday, having their worst day since August 2011.
  3. Institute of Supply Managers index came in at 53.5, down from 55.1 and below the 54.5 expected.
  4. Purchase applications fell for the third straight week.

The Heat Map

Posted on by

Most of the time the U.S. stock market looks to 3 factors (call them the “pillars” that support the stock market) to support its upward trend – let’s grade each of the pillars.

CONSUMER SPENDING: This grade is an A (very favorable) due to the favorable effect of lower gasoline and heating oil prices.

THE FED AND ITS POLICIES: We continue to grade this factor an A+ (extremely favorable) because the FED cannot do much more than it is doing to support the stock market and asset prices.

BUSINESS PROFITABILITY: This factor’s grade is a B- (slightly above average).

OTHER CONCERNS: The “Heat Map” is indicating the U.S. stock market is in good shape ASSUMING no international crisis. We have added the heightened risk of turmoil in Europe from the recent Greek election. The Greeks, with help from Russia, may take a hard line against paying back the huge bail-out loans with which Greece is saddled. On a scale of 1 to 10 with 10 being the highest level of crisis, we rate these collectively as a 3. These risks deserve our ongoing attention.

NOTE: there is no change from the prior week in the above ratings.

The Numbers

Posted on by

Last week, US Stocks and Foreign Stocks increased but Bonds declined. During the last 12 months, STOCKS outperformed BONDS.

Returns through 2-6-2015

1-week

Y-T-D

1-Year

3-Years

5-Years

10-Years

Bonds- BarCap Aggregate Index

-1.0

1.1

 5.6

 2.8

 4.3

4.7

US Stocks-Standard & Poor’s 500

3.1

.1

18.3

17.7

16.5

7.7

Foreign Stocks- MS EAFE Developed Countries

1.7

2.2

1.5

 8.9

7.6

4.8

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.

“Your Financial Choices”

Posted on by

“Your Financial Choices” The show airs on WDIY Wednesday evenings, from 6-7 p.m. The show is hosted by Valley National’s Laurie Siebert CPA, CFP®, AEP®. This week, Laurie, and her guests, Dawn Fernandez and Omar Zucco, representing the Lehigh Valley American Heart Association’s Go Red for Women initiative to raise awareness of heart disease and stroke in women. They will discuss: “Taking care of your most important asset – your health and what you can do to make a difference”

Laurie and her guests will take your calls on these topics and other inquiries this week. This show will be broadcast at the regular time. Questions may be submitted early through www.yourfinancialchoices.com by clicking Contact Laurie. 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 and Phillipsburg area; and, it is broadcast on FM 93.7 in the Fogelsville and 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.

The Markets This Week

Posted on by

The market’s wild moods continue, as bulls returned in force after being routed from the field the previous week. Stocks soared 3%, recovering all of the lost ground, on a rally fuelled by rising energy prices and robust U.S. economic data.

Oil rose 7% to $51.69 per barrel, and is up over 13% in the past two weeks. Although the European Central Bank took Greek bonds off its list of acceptable collateral, talks are ongoing about easing the country’s overwhelming debt problems. U.S. fourth-quarter earnings reports are meeting—albeit lowered—expectations.

What the state of global growth means to the Federal Reserve and when it will begin hiking interest rates—expected in midsummer—remain hotly contested. Action in 10-year U.S. Treasury notes suggests sooner rather than later, with the yields jumping 0.26, to 1.94%, the largest one-week increase since June 2013. (Bond prices move inversely to yields.)

Last week, the Dow Jones Industrial Average jumped 659 points, or 3.8%, to 17,824.29. The Standard & Poor’s 500 index tacked on 61, to 2055.47. The Nasdaq Composite rose 109, or 2.4%, to 4744.40.

Oil has become something of a Rorschach test for the global economy, says David Donabedian, chief investment officer at Atlantic Trust Private Wealth Management. The market is interpreting the energy rebound as a positive indicator for world growth.

A “nice stable level of crude gives investors confidence,” adds Randy Frederick, managing director of trading and derivatives at Charles Schwab. “The jobs data was universally positive, too.”

The Labor Department said on Friday that the unemployment rate in January rose to 5.7% from 5.6% on higher participation, but the details below the headline, such as payrolls and wage growth, were strong.

The economy is in the sweet spot—“not too hot and not too cold,” Donabedian says. Quarterly earnings are coming in better than expected, and a high-profile merger doesn’t hurt, he adds. On Thursday, Pfizer (ticker: PFE) agreed to buy Hospira (HSP) for about $16 billion. It rose 34%, to 87.43.

If evidence were needed that 2015 was more volatile than 2014, Frederick points out the average daily swing in the S&P 500 index so far this year is 19 points, nearly 1%, compared with 12 points in the same period of 2014 and a 10-points average for all of 2014. Volatility gives traders opportunities but investors agita.

(Source: Barrons Online)