THE MARKETS
Like a winded mountain climber approaching 25,000 feet, the
domestic stock market took a breather last week after several weeks
of strong gains.
If this breather turns into the "pause that refreshes," then the
markets may soon resume their upward march and continue the healing
from the bear market. Unfortunately, it does not always turn out
that neat and tidy. According to the Morgan Stanley Smith Barney
Asset Allocation Committee, given the loss of momentum in equity
markets during June, market participants are reevaluating equity
valuation measures.
Sometimes mountain climbers take a break and realize they can't
go any further. Likewise, investors digested some of the news last
week and realized that perhaps the market got a little ahead of
itself. In particular, investors seemed a bit spooked by news that
retail sales fell 0.1% in July and that the Reuters/University of
Michigan index of consumer sentiment fell in early August to its
lowest level since March. Although not a perfect correlation,
gloomy consumers may turn out to be stingy spenders and that could
be bad news for economic growth.
Similar to our hypothetical mountain climber mentioned above,
the powerful rally over the past few months may be treading in
rarefied air. Last week, it stopped to catch its breath. Over the
next few weeks, we'll see if it also catches a cold.
|
Data as of 8/14/09
|
1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
|
|
Standard & Poor's 500 (Domestic Stocks)
|
-0.6%
|
11.2%
|
-22.7%
|
-7.5%
|
-1.4%
|
-2.8%
|
|
DJ Global ex US (Foreign Stocks)
|
0.8
|
26.7
|
-17.8
|
-5.1
|
5.3
|
1.5
|
|
10-year Treasury Note (Yield Only)
|
3.6
|
N/A
|
3.9
|
5.0
|
4.3
|
6.0
|
|
Gold (per ounce)
|
-0.3
|
9.6
|
16.6
|
15.1
|
18.9
|
13.9
|
|
DJ-UBS Commodity Index
|
-2.1
|
8.8
|
-33.1
|
-9.5
|
-2.7
|
3.9
|
|
DJ Equity All REIT TR Index
|
-5.0
|
7.7
|
-35.2
|
-12.9
|
1.0
|
N/A
|
Notes: S&P 500, DJ
Global ex US, Gold, DJ-UBS Commodity Index returns exclude
reinvested dividends (gold does not pay a dividend) and the three-,
five-, and 10-year returns are annualized; the DJ Equity All REIT
TR Index does include reinvested dividends and the three-, five-,
and 10-year returns are annualized; and the 10-year Treasury Note
is simply the yield at the close of the day on each of the
historical time periods. Sources: Yahoo! Finance, Barron's,
djindexes.com, London Bullion Market Association. Past performance
is no guarantee of future results. Indices are unmanaged and
cannot be invested into directly. N/A means not available.
HOW MUCH OF THE STOCK MARKET RALLY since the
March lows is real versus fake? On the surface, 100% of the rally
is real since we can clearly document through third-party sources
that the market has risen significantly. But, is the rally real
from the sense that it is being driven by legitimate, sustainable
end-user demand or is the rally fake because it is being driven by
temporary and unsustainable government spending?
Worldwide, governments have spent, lent, or committed trillions
of dollars to support global commerce and to help end the
recession. In the U.S. alone, the number is greater than $12
trillion, according to an analysis by Bloomberg. So far, that money
has helped stabilize the world economy and helped pump up stock
prices as corporate earnings did not fall as much as initially
feared.
Consider this, though, what happens to the economy when the
government's "monetary lighter fluid" stops flowing?
Think of it this way. Let's say you want to start a fire in your
backyard fire pit. You gather some twigs, scrunch an old newspaper
and then throw a few logs on top. To ensure a strong start to your
fire, you douse it with lighter fluid. You light a match and then -
poof - you have a roaring fire. If you've effectively laid out your
twigs, paper, and wood, and your wood is dry, chances are your fire
will keep burning long after the lighter fluid is consumed. If not,
the fire will die shortly after the stimulus of the lighter fluid
is gone.
As it relates to the economy, government spending is akin to the
lighter fluid. It's igniting the economy and keeping it stimulated.
However, that stimulus will eventually end and taxes will likely
rise. If the economy starts tanking again as the stimulus wears
off, then we'll know that all we've done is mask a major
fundamental economic problem with a temporary pain reliever -
albeit a very expensive one!
Nobody knows what will happen to the economy when the government
largess ends. For our part, we continue to monitor the heartbeat of
the economy to try to discern whether it can keep beating under its
own power. If it can't, we will do our best to adjust your
portfolio and keep it beating to the tune of your long-term goals
and objectives.
Weekly Focus - Think About It
"Successful investing is anticipating the anticipations of
others."
--John Maynard Keynes
For your convenience the sources have been listed below:
http://www.marketwatch.com/story/us-retail-sales-drop-despite-cash-for-clunkers-2009-08-13
http://www.marketwatch.com/story/confidence-numbers-indicate-anemic-recovery-2009-08-14
http://www.thestreet.com/story/10561440/1/kass-dousing-the-fire-with-kerosene.html
http://www.bloomberg.com/apps/news?pid=20601087&sid=armOzfkwtCA4
http://www.minyanville.com/articles/Bernanke-Paulson-Greenspan-economy-Todd-debt/index...
http://www.thestreet.com/story/10561440/1/kass-dousing-the-fire-with-kerosene.html
http://www.brainyquote.com/quotes/authors/j/john_maynard_keynes.html
