THE MARKETS
Two tragedies, worlds apart, reached a boil last week and
affected the financial markets in a not so pleasant way.
Greece, which is an ocean away and no stranger to tragedy,
(think Aeschylus, Sophocles, and Euripides), nearly imploded last
week on fears that its government was bankrupt. With huge budget
deficits and no credible way to pay them, Greece saw its short-term
government bond yields soar past 20%, according to Barron's. By
contrast, the comparable bond in the U.S. yielded about 1% last
week, according to the Treasury Department. As a euro country,
Greece has limited tools to deal with the crisis on its own (e.g.,
it cannot devalue its currency or adjust its interest rates) so it
has to rely on the kindness of neighbors to bail it out. This past
weekend, the European Union and the International Monetary Fund
announced that they will support Greece with a $146 billion
multi-year aid package, according to Bloomberg. Now comes the hard
part for Greece--implementing the austerity measures that accompany
the bailout.
The concern that this debt problem could spread and undermine
the euro countries helped undercut many world stock markets last
week.
Closer to home, the uncapped oil leak in the Gulf of Mexico has
states bordering the Gulf bracing for an environmental and economic
disaster. The Gulf is a major oil-producing region and this spill
could deter new drilling, a thought which helped send oil prices up
more than 1% last week. Unfortunately, fishermen, the tourism
industry, and the environment itself all stand to lose, too, as the
spill worsens.
While the twin tragedies captured many of the headlines last
week, much of the economic news was bullish. For example, first
quarter gross domestic product grew at a respectable 3.2 percent
annual rate, household spending increased at the fastest rate in
three years, and The Institute for Supply Management-Chicago Inc.
said its business barometer rose to 63.8 in April, the highest
level in five years, according to Barron's. On top of that, The
Economist magazine said, "global output is now back to where
it was before the downturn…(and) there is growing optimism that the
recovery is becoming self-sustaining."
Although the twin tragedies are still developing, recent solid
economic news has helped limit their financial market impact.
|
Data as of 3/12/10
|
1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
|
|
Standard & Poor's 500
(Domestic Stocks)
|
-2.5%
|
6.4%
|
35.2%
|
-7.1%
|
0.4%
|
-2.1%
|
|
DJ Global ex US
(Foreign Stocks)
|
-1.4
|
1.0
|
39.5
|
-8.1
|
4.2
|
1.3
|
|
10-year Treasury Note
(Yield Only)
|
3.7
|
N/A
|
3.1
|
4.6
|
4.2
|
6.3
|
|
Gold
(per ounce)
|
3.5
|
6.8
|
33.5
|
20.3
|
22.0
|
15.7
|
|
DJ-UBS Commodity Index
|
-1.0
|
-3.2
|
21.8
|
-8.0
|
-2.5
|
3.2
|
|
DJ Equity All REIT TR Index
|
-1.2
|
17.5
|
68.6
|
-8.4
|
4.3
|
11.6
|
| 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. |
"EVEN AFTER THE BIGGEST RALLY SINCE THE 1930s,
U.S. stocks remain the cheapest in two decades as the economy
improves," according to an April 26 Bloomberg story. How can that
be? Well, digging into the numbers a bit, it appears the statement
comes with some qualifiers. First, the "cheapness" is based on the
price to earnings ratio (P/E) using forecasted earnings
estimates. By that measure, the S&P 500 is trading at 14.1
times forecasted earnings. As you know, forecasts may or may not
come true so, if earnings actually fall short of the projection,
then today's P/E will be higher in retrospect.
Second, while the Bloomberg headline said stocks were the
cheapest since 1990 based on analyst estimates, the article
qualified that and said, "except for the months after Lehman
Brothers Holdings Inc. collapsed." So, yes, stocks may be cheap
now, but they have been cheaper in the recent past.
But wait, in the same article, Bloomberg points to another
market valuation measure that says the market is significantly
overvalued. Using the 10-year average corporate earnings
model popularized by Yale economist Robert J. Shiller, the P/E on
the S&P 500 is currently about 22, which is well above the
historical average of 16.
Bulls will point to the P/E using forecasted earnings estimates
and say stocks are cheap. Bears will point to the Shiller
calculation and say stocks are dear. Regardless of which view is
ultimately correct, we stay focused on helping you reach
your goals and your objectives for the
future.
For your convenience the sources
have been listed below:
www.world-exchanges.org/statistics/ytd-monthly
online.barrons.com/article/SB127266698868684833.html
www.businessweek.com/news/2010-05-01/greek-notes-fall-a-second-wee...
www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate...
www.bloomberg.com/apps/news?pid=20601087&sid=alJWdKeR1TDU&pos=1
news.yahoo.com/s/afp/20100501/ts_alt_afp/stocksusweekly
news.yahoo.com/s/ap/20100502/ap_on_bi_ge/us_gulf_oil_spill
www.marketwatch.com/story/crude-oil-futures-edge-up-poised-for-monthly...
www.bloomberg.com/apps/news?pid=20601068&sid=aultrM6XMC5M
www.economist.com/opinion/displaystory.cfm?story_id=15951686
www.nytimes.com/2010/03/21/business/economy/21fund.html?ref=business
www.bloomberg.com/apps/news?pid=20601087&sid=ayxUdbONKGwo&pos=5
riddles.com
