Schwartz
Financial Weekly Commentary
March
10, 2014
The Markets
Okay, so Russia sending
troops into Ukraine’s Crimean Peninsula did unsettle world markets. At least it
did on Monday.
Like a diver
plummeting off a cliff, markets in various parts of the world lost value last
Monday as investors responded to the possibility of war between Ukraine and
Russia. The New York Times said it
like this:
“The escalating
crisis in Ukraine created turmoil in global markets on Monday, hitting stocks
from Wall Street to Ukraine and causing a spike in oil and natural gas prices
that could reach into consumers’ wallets. But despite fears that the conflict
between Russia and the West over Ukraine could shift into a military
confrontation, analysts said there was little risk of global financial
contagion or of major blowback to Western economies.
Perhaps that was
the reason markets generally did so well during the rest of the week. That and
the fact Russian President Vladimir Putin seemed to pause for a breath and,
possibly, a reconsideration of strategy after the Russian stock market lost
about $58 billion on Monday. (That’s more than the cost of the Sochi winter games.)
There were other economic consequences, too. A rapid decline in the value of
the ruble led to a sharp rise in short-term Russian interest rates, and the
Russian central bank was compelled to spend about $12 billion defending the
country’s currency.
Meanwhile, back in
the United States, the bull market celebrated its fifth birthday. During the
last five years, the value of investors' holdings in U.S. stocks has increased
by about $16 trillion, according to Wilshire Associates as reported in Barron’s. As if that weren’t remarkable
enough, last week the Federal Reserve reported the net worth of U.S. households
rose by nearly $3 trillion during the last quarter of 2013. It’s enough to make
you wonder whether the cost of quantitative easing, which expanded the Federal
Reserve’s by more than $3 trillion, was worth it.
Data as of 3/7/14
|
1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
|
|
Standard
& Poor's 500 (Domestic Stocks)
|
1.0%
|
1.6%
|
21.1%
|
12.8%
|
22.7%
|
5.1%
|
|
10-year
Treasury Note (Yield Only)
|
2.8
|
NA
|
2.0
|
3.5
|
2.9
|
3.8
|
|
Gold
(per ounce)
|
0.7
|
11.1
|
-15.5
|
-2.4
|
7.7
|
12.8
|
|
DJ-UBS
Commodity Index
|
1.6
|
8.3
|
-0.5
|
-6.9
|
5.4
|
-0.6
|
|
DJ
Equity All REIT TR Index
|
-0.4
|
7.9
|
4.2
|
11.0
|
31.6
|
8.4
|
Notes: S&P
500, 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.
where are they
now? Remember
that island in the Mediterranean that was in turmoil about a year ago and
turned to the European Union (EU) for a bailout? The situation in Cyprus was a bit confounding
because the country was growing relatively robustly and had a small budget
deficit. The issue was the country’s banks which were bigger than its domestic
economy. Cyprus had about 8 trillion euros in deposits and only 4.5 trillion euros
of annual government revenues, according to BCA Research cited in The Economist. Since bank deposit
guarantees are only as good as the country providing them, Cyprus needed some
help.
Eurozone leaders
responded to the Cypriot bailout request with demands for austerity and reforms
– pretty much the same thing they’d been requesting from other bailout
recipients – but a ‘bail-in’ also was part of the package. What is a
bail-in? The EU required debt holders
and uninsured depositors help absorb bank losses and fork up new capital. Although
the idea was initially rejected by the Cypriot parliament, the government capitulated
relatively quickly. The Economist
described it like this:
“At first, a raid
on insured [bank] deposits was envisaged, though ultimately they were spared
and the main victims were uninsured depositors – a decision made easier by the
fact that many of them were Russians. But getting creditors both to absorb
losses and to recapitalize the country’s biggest bank (which also had to absorb
the second-biggest and even more comprehensively bust bank) is not proving to
be a great success.”
How
unsuccessful has it been? The Cypriot economy contracted by about 5 percent in
2013 and is expected to continue to wither this year. Unemployment in the
country is at 17 percent.
There
are several lessons that can be learned from events in Cyprus, according to The Economist: 1) It’s important to have
a state-backed ‘bad’ bank where bad loans can be held and dealt with over the
long term; 2) Forcing uninsured depositors to take a hit helped protect
taxpayers, but it also damaged public confidence in banks; and 3) Fiscal policy
makers need pragmatic and flexible solutions because every banking crisis is
different.
Weekly Focus – Think
About It
“If
your actions inspire others to dream more, learn more, do more, and become
more, you are a leader.
--John Quincy Adams, Sixth President
of the United States
Value vs. Growth Investing (3/7/14)
|
1.03
|
2.49
|
5.07
|
5.20
|
25.16
|
15.46
|
25.90
|
|
|
1.07
|
1.87
|
4.57
|
4.44
|
23.82
|
15.25
|
23.99
|
|
|
1.42
|
2.09
|
5.11
|
3.71
|
24.53
|
17.13
|
25.46
|
|
|
0.60
|
3.04
|
4.36
|
6.22
|
28.89
|
16.41
|
24.90
|
|
|
1.23
|
0.37
|
4.25
|
3.25
|
18.20
|
12.19
|
21.57
|
|
|
0.76
|
4.48
|
6.11
|
7.62
|
28.78
|
16.12
|
30.67
|
|
|
0.93
|
5.35
|
6.13
|
8.37
|
26.45
|
16.80
|
30.97
|
|
|
0.55
|
5.24
|
5.68
|
8.98
|
28.80
|
14.50
|
28.27
|
|
|
0.81
|
2.80
|
6.58
|
5.45
|
30.96
|
16.97
|
33.01
|
|
|
1.44
|
3.40
|
7.44
|
6.34
|
29.04
|
15.52
|
32.06
|
|
|
1.72
|
4.01
|
8.07
|
6.39
|
28.69
|
14.44
|
31.33
|
|
|
1.39
|
3.16
|
7.41
|
6.24
|
32.93
|
16.17
|
30.40
|
|
|
1.21
|
3.02
|
6.83
|
6.35
|
25.67
|
16.01
|
34.72
|
|
|
1.34
|
2.86
|
5.52
|
4.81
|
25.12
|
16.90
|
27.00
|
|
|
0.64
|
3.49
|
4.81
|
6.78
|
29.12
|
16.02
|
26.01
|
|
|
1.15
|
1.04
|
4.89
|
3.90
|
21.26
|
13.42
|
24.70
|
©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:
How to Teach Your Teenagers about Saving and Investing
From the latest designer
jeans to fun-filled nights out with friends, teenagers sure know how to spend
money. However, in what won’t come as a surprise to parents of teenagers, a new
survey shows there’s a lot teens don’t know about managing their money.
According to the Jump$tart Coalition for Personal Financial Literacy, high
school seniors, on average, answered only 52.4% of the answers correctly on a
survey that measured basic financial literacy.
Because effective money
management results from disciplined behavior, which is most easily mastered if
learned early in life, it’s important for parents to take the lead in providing
their teens with a financial education.
Of
course, it’s difficult to know where to start, especially with teens who seem
more interested in their iPod than in their financial future.
Because
learning how to save and mange money begins with understanding what you spend,
your first move into the world of teen high finance might be to ask your teen
to keep an expense log on the computer or in a notebook. That way, they can see for themselves exactly where their money goes. The list
will undoubtedly uncover some surprises: “What, I spend $30 a month on cookies
from the school cafeteria?” From there, you can help your son or daughter to
draft a budget and periodically check in to ensure they stay on track.
Because teens have such high
expenses, the “to work or not to work” is often a common debate between parents
and teens. Today, many parents’ desire to make their children’s life easier
than they had it often denies the children the satisfaction and self-confidence
that come with hard work. Sure, the combination of academics and
extra-curricular activities may keep your teen too busy to work during the
school year, but will free time all summer long help your teens to grow up to
be happy and responsible? So that they can land that summer job, help your son
or daughter to put together a resume and discuss where they might work.
Once your teen is working
outside the home, discuss and agree on budget items you expect your teen’s
paycheck to cover -- and encourage a long-term rather than a short-term
perspective. Remember, for example, that with earned income, they qualify to
open a Roth IRA. Of course saving for
retirement is never going to be top on your teen’s list, but you might consider
gifting them
the money for the down payment on a car and encouraging them to open a Roth
IRA with their earned income. Why? Consider this: If a 15 year-old contributes
$1,000 each year until they are 65 with a 9% return, they could have over $800,000 in their retirement
account. That’s not a bad deal considering they would have invested only
$50,000.
With extra cash coming in, it’s a good
time to talk about other savings goals. Have your teen open a savings account
and get into the habit of making regular deposits. Using the “pay yourself
first” approach, encourage them to earmark a percentage of earnings, as well as
allowance and cash gifts, for deposit. Note that by allowing your son or
daughter to make withdrawals from his or her bank account to fund short-term
goals encourages them to view their savings account not as a black hole where their money is lost forever,
but as a place where their money works for them.
Along those
lines, you should also explore investment options such as stocks, bonds, and
mutual funds. Surprisingly, only 14.2% of respondents the
Jump$tart study said that stocks are likely to have higher average returns than
savings bonds. If you’re looking for teaching resources, log on to the National
Endowment for Financial Education® (NEFE®)’s web site at www.nefe.org.
You can begin by downloading the NEFE High
School Financial Planning Program® which includes worksheets for
charting spending, figuring a budget, and assessing job skills. You’ll also
find valuable information on everything from the power of compound interest to
how to assess investment risk.
Finally, but perhaps most importantly,
educate your teen about the hidden costs of using credit. Many teens see credit
cards as a convenience and don’t realize if they can’t pay the bill in full in
one month, they will be subject to interest charges. Ask your teen to figure
what 8% interest on a $100 purchase could add to the cost of the item over two
years. To encourage wise use of credit, consider listing your teen as an
authorized user on your credit account. Your teen will get a card with his or
her name on it, but will pay you for any purchases made during the month. If
the bill isn’t paid in full and on time, tack on interest. Of course, maybe your toughest teaching task is to model
good credit management. Teens learn more from what they see us do than
from what we say.
NEFE’s
philosophy, “learning about money is as important as earning it,” is great advice. Bottom
line? Financial lessons not learned at a young age become more expensive as we
grow older.
Regards,
,
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,
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Michael
L. Schwartz, RFC®, CWS®, CFS, offers securities and advisory services
through Independent Financial Group, LLC., A Registered Broker/Dealer,
Member FINRA-SIPC. Schwartz Financial
and Independent Financial Group, LLC are separate entities.
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.
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