THE MARKETS
Sometimes earnings move the markets. Sometimes politics does the
trick. Last week, both were in play and the result was not
pretty.
On the earnings front, some high-profile companies such as
Google, American Express, and Advanced Micro Devices reported
earnings that failed to excite investors and this negatively
impacted the market. General Electric and McDonalds, on the other
hand, issued rather upbeat earnings reports and investors responded
favorably. Mentioning these companies is for illustrative purposes
only and not intended as buy or sell recommendations.
Politically speaking, it was a week to remember. Investors
became agitated when the administration announced plans to limit
the size and scope of trading activities by big banks.
Historically, this has generally been a profitable activity for
banks and has added liquidity to the markets, according to CNBC.
Proponents of the administration's policy say it may help prevent
future financial crises while critics say it is an unnecessary
government intrusion in free markets. Adding more uncertainty, two
U.S. Senators said they would not support Ben Bernanke for a second
term as chairman of the Federal Reserve and there were rumblings
that Treasury Secretary Tim Geithner may be on his way out.
According to some market observers, the stock market would not
react well if either Bernanke or Geithner suddenly became
jobless.
These news items helped send the S&P 500 index to a weekly
loss of 3.9%. While we may be out of the heat of the financial
crisis that engulfed us in the fall of 2008, last week's action
shows that risks remain and we always have to remain vigilant.
|
Data as of 1/22/10
|
1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
|
|
Standard & Poor's 500 (Domestic Stocks)
|
-3.9%
|
-2.1%
|
31.2%
|
-8.5%
|
-1.3%
|
-2.5%
|
|
DJ Global ex US (Foreign Stocks)
|
-3.9
|
-1.1
|
54.3
|
-6.4
|
3.7
|
0.8
|
|
10-year Treasury Note (Yield Only)
|
3.6
|
N/A
|
2.6
|
4.8
|
4.1
|
6.7
|
|
Gold (per ounce)
|
-3.9
|
-1.8
|
26.0
|
19.3
|
20.5
|
14.2
|
|
DJ-UBS Commodity Index
|
-2.3
|
-3.1
|
22.3
|
-5.8
|
-1.8
|
3.3
|
|
DJ Equity All REIT TR Index
|
-4.4
|
-4.5
|
47.6
|
-14.7
|
0.8
|
10.2
|
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 applicable or not available.
WHAT ARE SOME OF THE MAJOR MARKET RISKS that
investors should be monitoring right now? After the dramatic bull
run over the past 10 months, it would not be surprising to see a
correction in the markets. This correction could be caused by a
wide variety of reasons, but here are three broad categories that
bear watching, according to a January 23, 2010 New York
Times article.
First, corporate earnings could disappoint investors. Thomson
Financial expects earnings from the S&P 500 companies to rise
28% in 2010. If earnings come in shy of expectations, or if
corporations offer tepid outlooks when they announce their Q4 2009
earnings, investors could get nervous and lighten up on
equities.
Second, market valuation is not necessarily cheap anymore. Last
March, the price-to-earnings ratio for the S&P 500 index
companies was 13.3, according to the 10-year averaged earnings
method as calculated by Yale economist Robert J. Shiller. Now, the
ratio is about 20.0, which is above the long-term average of around
16.0. Accordingly, we may not be able to count on an "expansion" of
the P/E ratio for further stock market gains.
Third, as we saw last week, government policy can impact the
financial markets. This is a wildcard because it is difficult to
predict what will come out of Washington - or other countries -
that could influence the markets. Because of the financial crisis,
government is heavily involved in the financial markets and the
economy so this policy risk is probably bigger than normal.
Of course, some other event could occur out of the blue and
affect the markets either positively or negatively, too.
Nonetheless, it is helpful to identify some of the more likely
risks and keep them top of mind so we can be responsive as
appropriate.
Weekly Focus - Think About It
"We have always known that heedless self-interest was bad
morals; we know now that it is bad economics."
-- Franklin D. Roosevelt (Second inaugural address, January 20,
1937)
finance.yahoo.com/news/American-Express-Capital-One-apf-371690815.html?x=0&.v=6
www.bloomberg.com/apps/news?pid=conewsstory&tkr=AMD%3AUS&sid=aegODJ2QtAvE
www.marketwatch.com/story/ge-4th-quarter-net-fell-19-exceeds-estimates-2010-01-22?sitei...
www.marketwatch.com/story/mcdonalds-profit-up-23-on-global-demand-2010-01-22?siteid=y...
www.bloomberg.com/apps/news?pid=20601087&sid=aowCpRWRZ27Q
www.cnbc.com/id/34975288
www.washingtonpost.com/wp-dyn/content/article/2010/01/21/AR2010012104935.html
www.cnbc.com/id/35012053
www.thestreet.com/story/10665733/1/cramers-mad-money-recap-next-weeks-game-plan-listen-...
www.nytimes.com/2010/01/24/business/24fund.html?ref=business
