I felt sorry for Jim Furyk in
yesterday’s U.S. Open. I am a fan – Jim is homegrown Pennsylvanian, is a
tall golfer, and has a unique swing (like mine). Sure, his performance in
the final round was disappointing. But, the pressure has to be incredibly
intense. I know from my personal experience, during the final couple
holes of a match, there is pressure on a 3 foot putt. And, my matches are
for mere bragging rights and not for a million dollar purse and a ticket to the
Golf Hall of Fame like the U.S. Open. Golf is a competitive sport at the
pro level and leaves no room for error. Let’s hope there will be an
opportunity down the road for Jim to redeem himself.
Last week NEGATIVE economic news exceeded POSITIVE economic news. The
markets seemed to take little notice; instead, they watched events in
Europe.
Below is a succinct list of last week’s
events:
Positives:
1)
Athens stock market rallies almost 14% on week on hopes New Democracy party
squeezes out win.
2) Unconfirmed story but likely central banks stand ready for coordinated
action to deal with potential bank runs depending on election outcome.
3) Historically low mortgage rates finally entice many as refinance apps jump
19.2% to most since April ’09 and purchase apps rise 1.28% to 6 month high.
4) Headline US Consumer Price Index slows to 1.7% year over year, slowest since
Jan ’11 and Producer Price Index up just .7% year over year due mostly to drop
in energy prices.
5) Consumer Price Index and Producer Price Index in China moderate further,
loan growth, exports and imports gain more than expected.
6) April machinery orders in Japan rise more than forecasted.
Negatives:
1)
Spanish bond yields spike on heels of 100billion euro of extra borrowing to
finance bank bailout. Italian yields also get dragged up.
2) US retail sales in May soft as drop in gasoline prices offset by iffy labor
market and modest income growth.
3) Initial Jobless Claims total 386k, 11k more than expected and the 9th week
in a row above 370k.
4) University of Michigan confidence in June falls to lowest of the yr as both
current conditions and the outlook fall.
5) Industrial Production unexpectedly falls .1% month over month.
6) June NY manufacturing survey falls 14.8 pts to weakest since Nov ’11..
7) Core Consumer Price Index growth remains sticky at 2.3% year over year,
matching the fastest pace since Sept ’08, Producer Price Index core up 2.7%
year over year.
8) Chinese retail sales and Industrial Production grow less than expected in
May.
9) India’s wholesale inflation up 7.55% year over year, more than estimated
ahead of its central bank’s rate meeting Monday. Industrial Production up just
.1%. Will slowest growth in 10 yrs offset still high inflation?
U.S.
equities defied fears about the Greek elections by rallying more than 1% last
week. The gains came as policy makers around the world reassured investors that
they would supply liquidity if the markets tumbled in the wake of the Greek
vote. The Dow rose 1.7%, or 213 points, to 12,767.17, its second consecutive
week of gains. The S&P 500 jumped 17 points to 1342.84, and the NASDAQ
added 14 points, to end at 2872.80. Stocks in the U.K., France, Germany, Spain
and Italy also climbed Friday.
Regulators
around the world made calming noises. Banking regulators indicated that they
might let banks use a wider variety of assets, like gold or equities, to meet
liquidity buffers, according to the Wall Street Journal. Speculation also grew
that central banks around the world would conduct synchronized easing if
necessary to calm the financial markets. And the Fed has a two-day meeting
ending Wednesday, at which some expect it to extend the Operation Twist
bond-buying program or restart quantitative easing.
“I’m
putting a lot of faith in markets making politicians behave and make the tough
decisions,” says John Manley, chief equity strategist at Wells Fargo
Advantage Funds, who expects the S&P 500 to remain in a trading range of
1250 to 1450. “This nonsense can’t go on forever.” Today’s
marketplace, he says, reminds him of the early 1980s, when the bond markets
pushed yields ever higher, giving the Federal Reserve the political cover to
fight inflation.
Charles Gave, GavKal Research’s chairman, is downright
optimistic about U.S. stocks. “We’ve been in a bear market for the best
part of the last 12 years” due to the misallocation of capital, he says.
China’s currency controls, the Fed’s artificially low interest rates and the
creation of the euro have caused this misallocation, and it’s about to end, he
predicts. “If the euro disappears, it’s fabulously good news. The markets
will go down for two days and up for many years,” Gave says. “We are
witnessing the end of social democracy.”
The euro’s
demise would result in money flowing out of short-term havens and into good,
independent companies that don’t rely on government spending. He likes
companies that have strong dollar-denominated cash flows, don’t need to borrow
money from banks, and don’t rely on government spending. Johnson & Johnson
(ticker: JNJ), IBM (IBM), Texas Instruments (TXN) and SAP (SAP) are among those
he sees thriving in the new world order. He’d avoid banks (Source:
Barrons Online).
Last week, U.S. Stocks and Foreign Stocks and Bonds all increased.
During the last 12 months, STOCKS outperformed BONDS (this is a change from
last week).
Returns
through 6-15-2012
1-week
Y-T-D
1-Year
3-Years
5-Years
10-Years
Bonds-
BarCap Aggregate Index
.3
2.4
6.8
7.3
6.9
5.6
US
Stocks-Standard & Poor’s 500
1.3
7.9
8.5
15.7
-.5
5.0
Foreign
Stocks- MS EAFE Developed Countries
2.3
-2.6
-17.1
1.6
-9.5
2.4
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.
Hang in there! After looking at your May investment statements it’s natural to have emotional reactions which range from fear to desperation. Global investment markets and economies will continually test investors with unsettling cycles that can’t be controlled. But while these market movements are largely unpredictable, their effect on investor emotions is predictable. In fact, it is called the “cycle of emotional investing” which illustrates many investors make investment decisions based upon emotions and not a well thought out strategy.
We can help you understand and manage the cycle of investor emotions through market fluctuations. Through the use of our investment philosophy and asset allocation approach, we can help provide the perspective, focus and discipline required to stay on a steady course to reaching your financial goals.
Below is a full description of the cycle of investor emotions:
Knowing we can never conquer our inherent emotional biases, we should seek to understand the range of emotions we may experience as investors and how it affects our interactions with the market. A common market psychology cycle exists that shines light on how emotions evolve and the effect they have on our decisions. By understanding the stages of this cycle, we can tame the emotional roller coaster. The fourteen stages are:
1.Optimism – A positive outlook encourages us about the future, leading us to buy stocks.
2.Excitement – Having seen some of our initial ideas work, we begin considering what our market success could allow us to accomplish.
3.Thrill – At this point we investors cannot believe our success and begin to comment on how smart we are.
4.Euphoria – This marks the point of maximum financial risk. Having seen every decision result in quick, easy profits, we begin to ignore risk and expect every trade to become profitable.
5.Anxiety – For the first time the market moves against us. Having never stared at unrealized losses, we tell ourselves we are long-term investors and that all our ideas will eventually work.
6.Denial – When markets have not rebounded, yet we do not know how to respond, we begin denying either that we made poor choices or that things will not improve shortly.
7.Fear – The market realities become confusing. We believe the stocks we own will never move in our favor.
8.Desperation – Not knowing how to act, we grasp at any idea that will allow us to get back to breakeven.
9.Panic – Having exhausted all ideas, we are at a loss for what to do next.
10.Capitulation – Deciding our portfolio will never increase again, we sell all our stocks to avoid any future losses.
11.Despondency – After exiting the markets we do not want to buy stocks ever again. This often marks the moment of greatest financial opportunity.
12.Depression – Not knowing how we could be so foolish, we are left trying to understand our actions.
13.Hope – Eventually we return to the realization that markets move in cycles, and we begin looking for our next opportunity.
14.Relief – Having bought a stock that turned profitable, we renew our faith that there is a future in investing.
Individuals clearly follow this cycle in their decision making process. Since broad indices like the S&P 500 are comprised of the decision of millions of individuals, we should expect index prices to track this pattern as well. If we are aware of the stage of the cycle we are experiencing at a given point in time we will have a greater grasp of how our emotions are affecting our investment decisions. This knowledge will help us manage our own investment portfolios as well as predict the next step for the broad market. Source: NW Mutual
This week Laurie and guest host, Attorney Lauren Sorrentino from Norris, McLaughlin and Marcus, will discuss the following subject matter:
“Matrimonial and family law including divorce, equitable distribution, alimony and prenuptials as you plan for the unexpected”
Laurie will take your calls on these subjects and other financial planning topics at 610-758-8810. This show will be broadcast at the regular time, Wednesday Night from 6-7 PM. 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.
I looked into the face of “austerity” when I visited Dublin, Ireland last weekend. What a change from my last visit 7 years ago. 7 years ago, my daughters and I visited the tallest building in Dublin, the Guinness brewery. I recall looking out upon the Dublin skyline and remarking to my daughter, “I have never seen as many construction cranes at one time in any city in my life”. And, in last week’s visit to Dublin, I noted no, none, zero construction cranes. Instead I noted a number vacant or half filled office buildings, wide-spread graffiti, and many young people standing in groups on the streets. Ireland is suffering from a terrible real estate bubble, a bailout of its banking system, and high unemployment. I cannot help but fear that the future of United States could hold the same fate IF the U.S. does not change its overspending, huge deficits, and chronic unemployment.
There is a silver lining to the Ireland malaise. Ireland voted on May 31 to tighten their belts, stay in the Euro, and work through their current problem instead of following a course of action which may have ended in Ireland exiting the European Union. Ireland has a tough row to hoe, but they have developed a framework to do so – given enough time, I am confident they will succeed.
Last week POSITIVE economic news exceeded NEGATIVE economic news and the markets were helped out by optimism from Europe
Below is a succinct list of last week’s events:
Positives:
1) After falling every single day last week, the Spanish IBEX (stock market index) rallies every single day this week in anticipation of bank recap via European Financial Stability Facility.
2) With room to move, the Peoples Bank Of China and Royal Bank Australia both cut interest rates.
3) Canada and Australia both report better than expected job gains in May.
4) HSBC private sector weighted services index in China rises to 54.7 from 54.1 to the best since Oct ’10.
5) UK Purchasing Managers Index services index holds at 53.3 for 2nd month instead of falling to 52.4 as expected.
6) US Institute for Supply Management services index unexpectedly rises to 53.7 in May vs 53.5 in April, a relief in light of growing economic worries.
Negatives:
1) Euro zone retail sales, German factory orders, German exports and Italian Industrial Production all fall more than expected in April.
2) From asset price/market standpoint, the European Central Bank, Bank of England and Ben Bernanke did not provide indications that they intend to stimulate.
3) Initial Claims 1k less than expected but last week revised up by 6k. Downward trend seen temporarily stalled out.
4) Notwithstanding another record low in mortgage rates, purchase apps fall for 4th straight week and refi’s only rise by 2%. Fed’s likely answer is to try to lower mortgage rates even more. Winning!
5) China’s state sector weighted Purchasing Managers Index services index falls to 55.2 from 56.1, the lowest since at least Mar ’11.
The
Dow Jones Industrial Average returned to the black last week, as stocks surged
3.6%, a testament to the fact that markets move on whispers from all corners of
the globe, now more than ever.
Not
only do investors need to watch the political machinations in Greece these
days, they have to care about how many Big Macs people are eating in China. The
answer: not enough. On Friday, McDonald’s (ticker: MCD) said sales in China
fell last month, and analysts blamed it on low consumer confidence.
China clearly recognizes the slowdown,
which is why the government cut interest rates on Thursday. In a week when
investors were fixated on what central banks might do to stimulate the markets,
China’s cut was the only real action.
Elsewhere,
the merest hint on Wednesday that the European Central Bank is open to cutting
rates—and news that some Fed officials are ready to act—sent shares rocketing.
The Dow jumped 286 points, its largest one-day gain this year, and finished the
week up 435.6, at 12,554.2. The Dow index posted its biggest weekly gain
of the year.
The
Nasdaq Composite added 110.9 points, or 4%, to 2858.42. And small-cap stocks,
as measured by the Russell 2000, rose 4.3%, to 769.17.
Are
traders getting ahead of themselves? Probably. Fed Chairman Ben Bernanke didn’t
sound particularly excited about using the Fed to shock the market back to life
when he spoke before Congress on Thursday.
“I
think people are putting way too much emphasis on boilerplate language coming
from the Fed,” said Brian Jacobsen, chief portfolio strategist at Wells
Fargo Funds Management. “So the chairman said they’ll ‘support the
economy.’ Of course they’re going to support the economy.”
The
FOMC won’t meet until June 19. That’s the same week of the Greek elections,
meaning investors get to ruminate again in the coming week.
That’s
not to say that next week will be a dull one. China is set to release data on
Saturday about retail sales and industrial production. This week’s rate cut
makes it apparent that the data will be disappointing, Jacobsen predicted. But
the fact that they didn’t cut rates by more than 25 basis points, to 6.31%,
indicates that it’s also unlikely to be disastrous.
European
Union officials will also hold a conference call on Saturday where Spanish
officials are expected to announce whether they need a bailout.
“The
markets are going to react on Monday even though it will be a quiet day on the
news front,” Jacobsen said
(Source: Barrons Online).
