Schwartz
Financial Weekly Commentary
October
20, 2014
The Markets
It’s a little early
for Halloween, but markets sure got spooked last week. After a 21-month ride to
mid-September highs, stock markets jolted and shook investors last week like
the most dramatic and scream-inducing rollercoaster at an amusement park’s
fright night. Barron’s described it like
this:
“The Dow Jones
Industrial Average endured dizzying swings each day, with a 460-point move
midday on Wednesday. That’s when the market came closest to hitting a
correction phase – that is, down 10 percent from the highs. The Standard &
Poor’s 500 index fell to 1,820.66, or down 9.5 percent intraday from the
all-time closing high of 2011.36, before closing on Wednesday down 7.4 percent
from highs.”
Despite the wild
ride, by Friday’s close, major U.S stock indices were down about 1 percent for
the week.
Restoring some perspective
After a week like last
week, it’s important to take a deep breath and cast a calm eye over current
financial and economic circumstances. This can help restore perspective and ensure
sound decision-making. Here are a few points to consider:
Ø Markets go through corrections: Last week’s drop
didn’t quite meet the definition of a market correction, but it came close. It’s
no secret stock market corrections can be unnerving but, as Kiplinger’s explained recently, “Corrections
are an inevitable part of investing. Since 1932, declines of 10 percent to 20
percent (the traditional definition of a correction) have occurred an average
of every two years, according to InvesTech Research.” Based on history, 10
percent corrections are normal and to be expected. It has been three years
since our last correction.
Ø There is a lot happening in the world: ‘When it rains, it
pours,’ as they say. A whole host of factors contributed to last week’s market
volatility. Let’s take a brief look at some prominent concerns:
§ Monetary policy
adjustments in the United States. The Federal
Reserve has been moving away from the highly accommodative monetary policies it
has pursued in recent years and that has some investors worried. Quantitative
easing is expected to end this month. The next step is raising the Fed funds
rate which is expected to happen next year. Last week, St. Louis Fed President
James Bullard reassured markets when he suggested, “The central bank should
extend its asset-purchase program when policy makers meet later this month.
U.S. stocks erased losses and Treasury yields rose on expectations the Fed will
take action to insulate the United States from global economic weakness,”
reported Bloomberg.
§ Possible deflation
in the Eurozone.
It’s not here yet, but some Eurozone countries have fallen back into recession
and the region is showing no growth. The European Central Bank reduced rates in
June and September and is expected to begin a round of bond buying next week.
These efforts may improve productivity and spur growth.
§ The strengthening
U.S. dollar
could
affect global liquidity. While a strong dollar has potential to slow
growth in emerging countries, liquidity issues may be balanced out
by the effect of falling oil prices. Reuters
reported, “The falling oil price… will improve household budgets in the United
States hugely – one study from Citi estimates the global windfall so far at
$660 billion which includes a $600 per-household bonus in the United States.” More
money in the pockets of U.S. consumers may translate into stronger emerging market
economies.
§ Slowing overseas
economic growth. Slower growth in China
is affecting markets around the world. Germany has experienced some economic
weakness recently. Brazil is in recession. U.S. economic growth is slow but
steady and is not expected to change.
§ The potential
spread of Ebola.
“This is a terrible human tragedy but Ebola’s transmission – through bodily
fluids – appears to be more difficult than SARS… The cost will be high in human
terms but, so far, there is nothing to suggest it won’t eventually be
contained,” reported Barron’s.
§ Political unrest
and military conflicts persist. Ukraine, the Middle East, Hong Kong, and other
regions of the world are embroiled in conflict. Unrest often impedes economic
growth.
When you add to the
mix human emotion and anxiety that has lingered since the financial crisis, you
create the potential for a week like the one we just had.
Ø Growth is healthy in the United States: Despite last
week’s market volatility, U.S. stock market fundamentals haven’t changed. Barron’s said:
“Fundamentally, the
market is fairly valued, but not overvalued, and the economic backdrop remains
healthy. The U.S. economy looks to be growing at a healthy pace – 4.6 percent
in the second quarter and an estimated 3 percent in the third. Third-quarter
earnings are expected to rise 5.1 percent year-to-year, according to FactSet.
Employment and manufacturing growth reaffirm the trend and, while retail sales
slipped 0.3 percent in September, falling gasoline prices have boosted consumer
confidence.”
Barron’s also pointed out
that, at Thursday’s close, 35 percent of the companies in
the Standard & Poor’s 500 had dividend yields that were higher than the 2
percent yield on 10-year U.S. Treasuries. The point being, market downturns
often create opportunities.
Ø Accommodative monetary policy has suppressed
volatility:
The Fed’s policies have kept market volatility lower in recent years than it
might have been otherwise. If you think back, you may remember the Chicago
Board Options Exchange's Volatility Index (VIX), also known as Wall Street’s
fear gauge, was at extraordinarily low levels this year. It moved from 12 to 26
during the past month. The historical average for the VIX is 20, and it reached
80 during the financial crisis. We need to get used to the idea that markets are
likely to be more volatile as monetary policy normalizes, according to experts
cited by Barron’s. The thing to
remember is market fluctuations are not unusual. They may make us uncomfortable,
but they should be expected.
Maintaining a disciplined approach
As you know, we
have a disciplined investment process that was designed to help you reach your
financial goals. While we monitor economic and market developments closely, we
don’t let the noise of day-to-day events determine our actions. We will not
take action until our process indicates we should. It’s important for you to understand
we make decisions about your account all the time, and much of the time we
decide to do nothing. We have confidence in our process. It is the reason we
sleep well at night.
Data as
of 10/17/14
|
1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
|
|
Standard
& Poor's 500 (Domestic Stocks)
|
-1.0%
|
2.1%
|
8.9%
|
16.3%
|
11.4%
|
5.4%
|
|
10-year
Treasury Note (Yield Only)
|
2.2
|
NA
|
2.6
|
2.2
|
3.4
|
4.1
|
|
Gold
(per ounce)
|
1.3
|
2.7
|
-6.4
|
-9.8
|
3.3
|
11.4
|
|
Bloomberg
Commodity Index
|
-0.6
|
-6.6
|
-9.1
|
-7.2
|
-3.0
|
-2.5
|
|
DJ Equity
All REIT Total Return Index
|
1.6
|
17.4
|
10.8
|
17.6
|
16.6
|
8.4
|
S&P 500,
Gold, Bloomberg 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 Total Return 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.
Weekly Focus – Think About It
“Wealth is the ability to fully experience life.”
--Henry David Thoreau, American author
Value
vs. Growth Investing (10/17/14)
|
-0.58
|
2.92
|
-5.84
|
-3.38
|
9.90
|
18.84
|
14.26
|
|
|
-1.15
|
3.75
|
-5.56
|
-3.12
|
11.11
|
18.57
|
13.71
|
|
|
-0.75
|
5.18
|
-4.51
|
-1.76
|
11.02
|
21.13
|
14.79
|
|
|
-1.02
|
4.53
|
-5.58
|
-1.87
|
13.45
|
18.18
|
14.79
|
|
|
-1.69
|
1.58
|
-6.61
|
-5.71
|
8.80
|
16.65
|
11.65
|
|
|
0.69
|
2.07
|
-6.64
|
-4.01
|
8.19
|
19.79
|
15.87
|
|
|
0.83
|
4.26
|
-6.24
|
-4.26
|
10.61
|
20.87
|
16.96
|
|
|
1.39
|
0.30
|
-6.41
|
-2.22
|
6.08
|
16.40
|
15.07
|
|
|
-0.20
|
1.89
|
-7.31
|
-5.55
|
8.15
|
22.24
|
15.55
|
|
|
2.14
|
-3.42
|
-6.46
|
-4.40
|
2.33
|
18.79
|
14.78
|
|
|
1.98
|
-1.92
|
-6.74
|
-4.98
|
3.77
|
18.89
|
14.10
|
|
|
2.56
|
-7.37
|
-6.42
|
-3.38
|
-2.66
|
16.72
|
14.82
|
|
|
1.90
|
-1.02
|
-6.23
|
-4.78
|
5.97
|
20.75
|
15.36
|
|
|
-0.26
|
4.48
|
-5.01
|
-2.49
|
10.42
|
20.90
|
15.23
|
|
|
-0.34
|
2.88
|
-5.79
|
-2.04
|
10.81
|
17.71
|
14.91
|
|
|
-1.17
|
1.47
|
-6.72
|
-5.61
|
8.47
|
18.08
|
12.70
|
©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:
“barrel of bricks”
Long-term
care is one of those unexpected expenses everyone should plan for but few
people actually do.
Consider
this humorous accident report from someone who should have considered long-term
care sooner.
I
am writing in response to your request for additional information on my accident
report. In block number three of the
accident reporting form I wrote, “Trying to do the job alone,” as the cause of
my accident. You said in your letter
that I should explain more fully and I trust the following details will be
sufficient.
I
am a bricklayer by trade. On the day of
the accident I was working alone on the roof of a new six-story building. When I completed my work I discovered that I
had about 500 pounds of brick left over.
Rather than carry the bricks down by hand, I decided to lower them in a
barrel by using a pulley, which fortunately was attached to the side of the
building at the sixth floor.
Securing
the rope at ground level, I went up to the roof, swung the barrel out, and
loaded the bricks into it. Then I went
back to the ground level and untied the rope, holding tightly to it to ensure a
slow decent of the 500 pounds of brick.
You will note in block eleven of the accident report that I weigh 135
pounds.
Due
to my surprise at being jerked off the ground so suddenly, I lost my presence
of mind and forgot to let go of the rope.
Needless to say, I proceeded at a rather rapid rate up the side of the
building.
In
the vicinity of the third floor I met the barrel coming down. This explains the fractured skull and broken
collarbone.
Slowing
down slightly, I continued my rapid ascent, not stopping until the fingers of
my right hand were two knuckles deep into the pulley. Fortunately, by this time I had regained my
presence of mind and was able to hold tightly to the rope in spite of my pain.
At
approximately the same time, however, the barrel of bricks hit the ground and
the bottom fell out of the barrel.
Devoid of the weight of the bricks, the barrel now
weighed approximately 50 pounds. I
refer you again to my weight in block eleven. As you might imagine, I began a rapid decent
down the side of the building. In the
vicinity of the third floor I met the barrel coming up. This accounts for the two fractured ankles
and the lacerations of my legs and lower body.
The
encounter with the barrel slowed me enough to lessen my injuries when I fell
onto a pile of bricks and, fortunately, only three vertebrae were cracked.
I
am sorry to report, however, that as I lay there on the bricks in pain, unable
to stand, and watching the empty barrel six stories above me I again lost my
presence of mind. I let go of the rope.
Moral of this tale:
It doesn’t pay to try to do the job alone.
Maybe you
should take a serious look at long-term care now to prepare for the time when
you or your loved ones might need it. I
can help you evaluate your options and needs to avoid your “barrel of bricks.”
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,
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, a registered principal offering securities and
advisory services through Independent Financial Group, LLC., a registered
broker-dealer and investment advisor.
Member FINRA-SIPC. Schwartz Financial and Independent Financial Group
are unaffiliated 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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