THE MARKETS
Despite a disappointing jobs report, stocks still managed to
post a solid gain last week. In fact, all three major U.S. indexes
--the Dow Jones Industrial Average, the S&P 500, and the NASDAQ
Composite --ended last week in positive territory for the year,
according to CNBC.
Strong corporate earnings are helping to keep a floor under the
market. Roughly 75% of the companies that have reported second
quarter earnings beat Wall Street estimates, according to CNBC. Of
course, one factor that helped corporate America post strong
earnings was keeping a tight rein on employment costs.
Unfortunately, what's good for corporate America may not always be
good for "employment" America.
Bond yields continued to decline last week as the 2-year
Treasury hit a record low of 0.50%. The 10-year Treasury yielded
2.82%, which is a 15-month low. Foreign country bonds are sporting
low yields, too. The 10-year German Bund hit a record low yield of
2.51% last week, while the benchmark Japanese 10-year government
bond yielded just 1.05% last week, according to
Barron's.
Low yields suggest either slower economic growth ahead or little
to no inflation, or both, according to Barron's. Low rates
are generally good for businesses because it makes their cost of
capital lower and makes it easier for them to reinvest for future
growth. So far, the low rates appear to have helped stabilize the
economy, but robust growth and reinvestment has yet to materialize,
according to The New York Times.
Overall, the mixed economic data is helping keep the market
stuck in a broad range.
|
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)
|
1.8%
|
0.6%
|
11.0%
|
-8.6%
|
-1.7%
|
-2.7%
|
|
DJ Global ex US
(Foreign Stocks)
|
2.8
|
-0.9
|
9.6
|
-8.7
|
2.5
|
1.5
|
|
10-year Treasury Note
(Yield Only)
|
2.8
|
N/A
|
3.8
|
4.7
|
4.4
|
6.0
|
|
Gold
(per ounce)
|
3.3
|
9.4
|
25.3
|
21.6
|
22.6
|
16.0
|
|
DJ-UBS Commodity Index
|
0.8
|
-2.8
|
3.8
|
-6.9
|
-3.6
|
3.0
|
|
DJ Equity All REIT TR Index
|
1.3
|
16.9
|
39.8
|
-3.6
|
2.8
|
10.6
|
| 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. |
"WE ARE IN A NEW NORMAL WORLD in which the
distribution of outcomes is flatter and the tails are fatter,"
according to a July 2010 Global Perspective report from Richard
Clarida of PIMCO. What in the world does that mean?
Clarida's words might sound like mumbo jumbo, but he actually
makes a solid case that planning for "extreme" outcomes rather than
"average" outcomes might be the appropriate investment strategy in
the current climate.
History tells us that the average annualized total return on the
S&P 500 between 1926 and 2009 was 9.9% and the standard
deviation was 19.2, according to TD Ameritrade. Standard deviation
is a measure of volatility and at 19. 2 (one standard deviation),
it means that about 68% of the time, we would expect the S&P
500 annual return to be somewhere between a loss of 9.3% and a gain
of 29.1%. At two standard deviations, it means that about 95% of
the time, we would expect the S&P 500 to return somewhere
between a loss of 28.5% and a gain of 48.3%. At three standard
deviations, it means that about 99.7% of the time, we would expect
the S&P 500 to return somewhere between a loss of 47.7% and
gain of 67.5%.
Clarida is suggesting that, in the future, more of the returns
in the financial markets will fall in the 2nd or 3rd standard
deviation range (the "fat tail") instead of the 1 standard
deviation range (the "hump"). If true, this means we could expect
more volatility -- both positive and negative -- in the future.
The future could be more volatile due to such things as the
unpredictable nature of government regulation and bailouts,
sovereign debt levels, high-frequency trading, geopolitical
flare-ups, social unrest, high unemployment, and medical or
scientific breakthroughs.
Recent events such as the May 6 "Flash Crash," the 2008
financial crisis, the 2007-2009 bear market, and the 2008 spike and
then collapse in oil prices, support Clarida's idea that we live in
volatile times.
So, if we are temporarily living in a "fat tail" world, then it
makes sense to plan accordingly. And, that's what we're trying to
do on your behalf.
For your convenience the sources
have been listed below:
www.cnbc.com/id/38596993
online.barrons.com/article/SB50001424052970204593404575...
online.barrons.com/article/SB50001424052970204078204575...
www.nytimes.com/2010/07/26/business/economy/26earnings.h...
www.pimco.com/Pages/TheMeanoftheNewNormalIsanObserv...
planning.tdameritrade.com/sites/client/tda/tdap/article.vm?siteC...
mathworld.wolfram.com/StandardDeviation.html
historicalreturns-sp500.blogspot.com/
thinkexist.com/quotation/take_calculated_risks-that_is_quite_...
