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)
|
-1.35
|
9.04
|
3.05
|
-2.97
|
3.05
|
14.25
|
0.91
|
|
|
-1.16
|
10.01
|
3.22
|
-2.01
|
5.43
|
13.41
|
0.57
|
|
|
-1.16
|
10.27
|
3.05
|
-1.44
|
8.15
|
13.30
|
1.97
|
|
|
-1.89
|
13.58
|
3.29
|
-3.50
|
6.21
|
15.08
|
2.49
|
|
|
-0.35
|
6.48
|
3.31
|
-1.17
|
1.71
|
11.87
|
-3.03
|
|
|
-1.56
|
6.62
|
2.77
|
-5.65
|
-2.99
|
16.32
|
1.26
|
|
|
-1.94
|
7.28
|
2.86
|
-5.32
|
0.13
|
18.07
|
2.32
|
|
|
-1.18
|
7.73
|
2.45
|
-5.92
|
-6.17
|
16.40
|
1.50
|
|
|
-1.61
|
4.83
|
3.05
|
-5.81
|
-2.97
|
14.36
|
-0.35
|
|
|
-2.85
|
5.62
|
1.94
|
-5.42
|
-4.19
|
16.01
|
2.43
|
|
|
-3.25
|
5.22
|
2.01
|
-6.39
|
-7.15
|
14.66
|
0.97
|
|
|
-2.67
|
6.15
|
1.87
|
-5.04
|
-4.36
|
15.29
|
2.55
|
|
|
-2.61
|
5.52
|
1.93
|
-4.79
|
-0.72
|
18.12
|
3.59
|
|
|
-1.46
|
9.36
|
2.94
|
-2.52
|
5.53
|
14.47
|
2.14
|
|
|
-1.80
|
11.87
|
3.04
|
-4.09
|
2.89
|
15.46
|
2.36
|
|
|
-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.
