Schwartz Financial Weekly Commentary 7/30/12

The Markets

“Within our mandate, the ECB is willing to do whatever it takes to preserve the euro and, believe me, it will be enough.”

--Mario Draghi, European Central Bank (ECB) President

It’s quite amazing how one sentence from one man can help spark a major rally in stocks, bonds, and the euro currency. Draghi’s comments last Thursday in London represent a significant ramping up of the ECB’s willingness to use its resources to hold the euro together and investors responded enthusiastically. On the day of Draghi’s comments:

• The euro and the British pound each gained more than 1 percent against the U.S. dollar.
• Stocks were positive in nearly all European markets.
• Italian and Spanish indexes each jumped more than 5 percent.
• The Spanish 10-year bond yield dropped nearly half a percentage point from the day before and the 10-year Italian bond yield was down a similar amount.
• The S&P 500 index rallied 1.6 percent.

Sources: The Wall Street Journal; CNBC

Between Draghi in Europe and Fed Chairman Ben Bernanke in the U.S., central bankers seem to be exerting an outsized influence on the markets. Normally, you expect markets to roughly trend with corporate earnings.

Speaking of earnings, several high-profile companies including Amazon, Facebook, and Starbucks, fell short on their second quarter earnings numbers released last week, according to CNBC. Overall, earnings for the companies reporting so far this quarter have been a bit on the light side, according to CNBC.

While earnings ultimately matter in the long run, today’s markets seem focused on the support provided by central banks. And, yes, an up market is an up market regardless of what’s propelling it. However, for long-term sustainability, we need the markets to go up based on their earnings growth – not artificial stimulus.

Data as of 7/27/12	1-Week	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor's 500 (Domestic Stocks)	1.7%	10.2%	7.3%	12.2%	-1.0%	4.4%
DJ Global ex US (Foreign Stocks)	0.9	1.4	-16.9	2.3	-6.6	5.8
10-year Treasury Note (Yield Only)	1.6	N/A	3.0	3.7	4.8	4.5
Gold (per ounce)	2.7	2.8	-0.4	19.2	19.6	18.2
DJ-UBS Commodity Index	-1.9	2.0	-13.1	5.1	-3.4	4.0
DJ Equity All REIT TR Index	1.0	17.2	13.6	29.4	4.9	11.3

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.

THE BEST AND THE WORST DAYS IN THE STOCK MARKET tend to occur rather close to each other and that has major implications for how to be a successful investor.

While it’s tempting to try to aggressively “time” the stock market and be in on the best days and sitting in cash on the worst days, that’s not a viable strategy. The chart below shows how just a few days each decade made a profound impact on the performance of the market over that decade. 

Decade	Annualized Return by Decade	Return Excluding 10 Best Days	Return Excluding 20 Best Days	Return Excluding 30 Best Days	Return Excluding 40 Best Days
1970s	1.6%	-2.3%	-5.0%	-7.2%	-9.1%
1980s	12.6	7.6	4.6	2.0	-0.4
1990s	15.3	11.0	8.0	6.0	3.0
2000s	-2.7	-9.2	-13.2	-16.9	-19.5

Source: BMO Capital Markets

For example, during the 1980s, the S&P 500 had an average annualized return of 12.6 percent. However, if you excluded the return of the 40 best days during that decade, then the return would have fallen to a negative 0.4 percent. In other words, just 40 days out of that 10-year period accounted for all of the return for the decade. Wow!

Now, you also have to know that missing the 40 worst days during the decade would have a profound positive impact on your performance. But, here’s the rub – it would take perfect foresight to know in advance when these 40 best and worst days would occur. And, of course, none of us have that.

What makes aggressive timing even more difficult is that these best and worst days often happen pretty close to each other. BMO Capital Markets discovered that since 1970, more than 50 percent of the 40 best days occurred within two weeks of one of the 40 worst days! So, imagine this… the stock market has one of its worst 40 days for the decade and you are lucky enough to be sitting 100 percent in cash that day. Now, realistically, after a big drop like that, are you going to have the nerve to jump 100 percent right back in? If you didn’t, you’d miss more than half of the 40 biggest up days since those big up days often occur within two weeks of a big down day.

The lesson here is simple. Markets are volatile and the price of long-term return is enduring the pain of periodic declines.  

Weekly Focus – Think About It…

“The most important thing in the Olympic Games is not winning, but taking part; the essential thing in life is not conquering, but fighting well.”

--Pierre de Coubertin, founder of the modern Olympic Games

Value vs. Growth Investing (7/26/12)

Name	1-Week	YTD	4-Week	13-Week	1-Year	3-Year	5-Year
US Market	-1.35	9.04	3.05	-2.97	3.05	14.25	0.91
Large Cap	-1.16	10.01	3.22	-2.01	5.43	13.41	0.57
Large Core	-1.16	10.27	3.05	-1.44	8.15	13.30	1.97
Large Growth	-1.89	13.58	3.29	-3.50	6.21	15.08	2.49
Large Value	-0.35	6.48	3.31	-1.17	1.71	11.87	-3.03
Mid Cap	-1.56	6.62	2.77	-5.65	-2.99	16.32	1.26
Mid Core	-1.94	7.28	2.86	-5.32	0.13	18.07	2.32
Mid Growth	-1.18	7.73	2.45	-5.92	-6.17	16.40	1.50
Mid Value	-1.61	4.83	3.05	-5.81	-2.97	14.36	-0.35
Small Cap	-2.85	5.62	1.94	-5.42	-4.19	16.01	2.43
Small Core	-3.25	5.22	2.01	-6.39	-7.15	14.66	0.97
Small Growth	-2.67	6.15	1.87	-5.04	-4.36	15.29	2.55
Small Value	-2.61	5.52	1.93	-4.79	-0.72	18.12	3.59
US Core	-1.46	9.36	2.94	-2.52	5.53	14.47	2.14
US Growth	-1.80	11.87	3.04	-4.09	2.89	15.46	2.36
US Value	-0.76	6.09	3.17	-2.38	0.57	12.81	-2.01

©2004 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) is not warranted to be accurate, complete or timely. Morningstar is not responsible for any damages or losses arising from any use of this information and has not granted its consent to be considered or deemed an “expert” under the Securities Act of 1933. Past performance is no guarantee of future results.  Indices are unmanaged and while these indices can be invested in directly, this is neither a recommendation nor an offer to purchase.  This can only be done by prospectus and should be on the recommendation of a licensed professional.

Office Notes:

Olympics’ Time Again

Unless you’ve been hiding under a rock, you probably know that we are in our next installment of the Olympic Games. Few things can equal the amount of drama and spectacle that the Olympics offer, or the popularity.  During the 2008 Beijing games over 27 million Americans watched the games every day; total viewership was 211 million. During the 2010 Vancouver games the number was 24.4 million per day, with a total viewership of 190 million. Probably every person has seen at least some part of the Olympics during their lifetime.

We all have dramatic memories from the Games. Most are feats of amazing athleticism or teamwork; others are more emotional and personal.

The Olympics have a power that is possibly unrivaled on earth, defying international borders and political boundaries. It’s a common sight to see athletes from countries currently at war with each other competing peacefully and amicably. During the 2000 games in Sydney, the North Korean and South Korean teams marched together during the opening ceremonies. Theirs is just one of many examples throughout the games that show us that we are more alike than we sometimes remember.

The games are held on the world’s largest stage but the stories of the athletes inspire us on a very intimate level. In the 1992 Games in Barcelona, Derek Redmond’s hamstring tore during the semifinal heat of the 400 M. His father, Jim, rushed from the stands and helped his injured son finish the race. This moment of a father helping his son fulfill a lifelong dream is the perfect example of the humanity and individuality that the games display.

Regardless of why we watch the games and the lessons we learn from them, we do watch. We watch because we all love to see greatness, and the Olympics show us greatness at every level. So, I invite you to sit back and enjoy what truly is one of the greatest shows on earth.

Michael L. Schwartz, RFC®, CWS®, CFS

P.S.  Please feel free to forward this commentary to family, friends, or colleagues.  If you would like us to add them to the list, please reply to this email with their email address and we will ask for their permission to be added. 

Michael L. Schwartz, RFC®, CWS®, CFS, offers securities through First Allied Securities, Inc., A Registered Broker/Dealer,  Member FINRA-SIPC.  Advisory Services offered through First Allied Advisory Services, A Registered Investment Advisor.

Schwartz Financial Service is not an affiliate of First Allied Securities, Inc.

This information is provided for informational purposes only and is not a solicitation or recommendation that any particular investor should purchase or sell any security. The information contained herein is obtained from sources believed to be reliable but its accuracy or completeness is not guaranteed.  Any opinions expressed herein are subject to change without notice.  An Index is a composite of securities that provides a performance benchmark.  Returns are presented for illustrative purposes only and are not intended to project the performance of any specific investment.  Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly.  Past performance is not a guarantee of future results.

* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

* The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices. 

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.

* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

* Past performance does not guarantee future results.

* You cannot invest directly in an index.

* Consult your financial professional before making any investment decision.