Schwartz Financial Weekly Commentary 2/2/15

 

Schwartz Financial Weekly Commentary

February 2, 2015

 

The Markets

 

It’s true. January did not turn out to be the best month for U.S. stock markets. At the end of the month, the Standard & Poor’s 500 Index (S&P 500) was down about 3.1 percent. Before you start listening to pithy observations – the saying ‘as goes January, so goes the year’ has been making the rounds – think back to January 2014. The S&P 500 finished the month down 3.6 percent and still managed to deliver positive performance (up 11.4 percent) for the year.

 

That said, there is a lot going on around the world and it’s making markets as feisty as a broody hen. Some of the issues include:

 

·         Low, low oil prices: Oil prices are a boon to consumers at the pump and a detriment to the oil industry which has suffered layoffs and cancelled projects, according to Barron’s.

·         Greek elections: The Syriza party won the Greek election on promises to reduce austerity measures and restructure Greek debt. Forbes reported there is uncertainty about how this will affect the Greek economy and the euro.

·         Currency issues: The Federal Reserve is tightening monetary policy while other central banks are easing. With the value of the euro dropping from $1.45 to about $1.15, U.S. exports are getting more expensive overseas, but it has become a lot cheaper for Americans to travel to most parts of Europe.

·         Deflationary pressures: CNBC.com reported prices in the Eurozone fell 0.6 percent year-to-year in January. That was after a 0.2 percent decline in December. Some folks are worried inflation in the U.S. could be headed south, too, if the Federal Reserve raises interest rates too much, too soon.

 

While stock markets have been struggling (the Dow and the S&P 500 are down but still within 5 percent of their December record highs, according to Barron’s), the government bond market has been thriving. Experts cited by Barron’s estimated about 16 percent of the government bonds they track, about $3.6 trillion worth, traded at negative yields last week. MarketWatch.com reported, for just the fourth time in more than 50 years, the dividend yield on the S&P 500 Index was higher than the yield on benchmark 10-year Treasury bonds last week.

 

Data as of 1/30/15	1-Week	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor's 500 (Domestic Stocks)	-2.8%	-3.1%	11.2%	15.0%	12.9%	5.4%
10-year Treasury Note (Yield Only)	1.7	NA	2.7	1.8	3.7	4.1
Gold (per ounce)	-2.7	5.1	1.4	-10.0	3.0	11.6
Bloomberg Commodity Index	-0.3	-3.4	-20.2	-11.4	-5.1	-3.7
DJ Equity All REIT Total Return Index	-1.6	6.2	32.0	16.4	18.9	9.9

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.

 

Its value is estimated at more than $1 Trillion…

Is it the 2014 U.S. government-spending bill?

Is it the 282 billion Big Macs?

Is it 3.1 million Ferrari 599 GTBs?

Is it the amount of U.S. currency currently in circulation?

 

All of the above are estimated to be worth more than $1 trillion and so is student loan debt in the United States. Outstanding student loans are roughly equal to all of the greenbacks circulating the world. According to The Wall Street Journal:

 

“Ever-escalating tuitions, especially in the past dozen years, have produced an explosion of associated debt as students and their families resorted to borrowing to cover college prices that are the only major expense item in the economy that is growing faster than health care. According to the Federal Reserve, educational debt has shot past every other category – credit cards, auto loans, refinancings – except home mortgages, reaching some $1.3 trillion this year.”

 

The Journal said about 70 percent of 2014 graduates borrowed to pay for college, and they left school with an average debt of $33,000. The amount owed varies significantly by state, according to U.S. News & World Report. In 2013, students in New Hampshire, Delaware, Pennsylvania, Rhode Island, and Minnesota graduated with debt exceeding $30,000 on average, while those in New Mexico, California, Nevada, the District of Columbia, and Oklahoma had debt of less than $20,000 on average.

 

While there may be some attractive alternatives for student borrowers – including income-based repayment loans and crowdfunding for college – the Journal cited statistics showing America’s student debt could be negatively affecting our country’s economic dynamism. The percentage of younger Americans who own part of a business dropped from 6.1 percent to 3.6 percent between 2010 and 2013. Also, during the past decade, the percentage of new businesses started by people younger than age 34 fell from 26.4 percent to 22.7 percent.

 

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 U.S. President

Value vs. Growth Investing (1/31/15)

Name	1-Week	YTD	4-Week	13-Week	1-Year	3-Year	5-Year
US Market	-2.55	-2.72	-2.72	-0.40	13.36	17.44	15.89
Large Cap	-2.92	-3.03	-3.03	-0.76	14.08	17.30	15.23
Large Core	-3.96	-4.21	-4.21	-0.42	16.11	19.25	16.36
Large Growth	-1.51	-0.42	-0.42	1.15	17.31	18.76	16.78
Large Value	-3.33	-4.60	-4.60	-3.18	8.75	14.04	12.61
Mid Cap	-1.52	-1.61	-1.61	0.92	12.85	18.27	17.80
Mid Core	-1.48	-1.71	-1.71	1.51	15.80	18.58	19.14
Mid Growth	-1.50	-0.71	-0.71	1.02	10.31	16.28	17.20
Mid Value	-1.57	-2.41	-2.41	0.19	12.76	20.05	17.01
Small Cap	-1.72	-2.73	-2.73	-0.38	7.12	16.24	16.70
Small Core	-1.76	-2.74	-2.74	-0.66	8.71	16.17	16.10
Small Growth	-1.64	-1.67	-1.67	0.15	3.59	15.42	17.40
Small Value	-1.77	-3.72	-3.72	-0.62	9.01	17.09	16.57
US Core	-3.31	-3.61	-3.61	-0.04	15.53	18.91	16.96
US Growth	-1.52	-0.56	-0.56	1.07	14.96	18.02	16.98
US Value	-2.85	-4.08	-4.08	-2.31	9.60	15.47	13.78

 

 ©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 Happenings

 

Checking Your Risk Tolerance

 

What is the maximum percentage you would be willing to lose in any one year in your portfolio?  Suppose that an investment you held for one year lost 15 percent of its value but its performance was similar to other investments of that type.  What would you do?

 

What would cause you more stress – not owning stocks when the market rises or owning stocks when it drops?  Of course, all investments involve risk. Identifying and recognizing your personal risk tolerance is critical to choosing a portfolio and is an important first step in any investment decision.

 

There are many types of investment risk. Depending on your goals and time frame, you may be able to tolerate some forms more than others. For example, how exposed is your portfolio to the following general risks?

 

• Market risk: the possibility that the value of your portfolio will fall as a result of broad stock price declines.
• Inflation risk: portfolio returns that don’t outpace the rising cost of living.
• Shortfall risk: the chance that a chosen investment strategy won’t provide the return needed to achieve a particular goal.
• Interest rate risk: the losing end of the seesaw effect in which interest rates rise while bond prices typically fall, and vice versa.
• The better you understand these and other risks, the better prepared you may be to assess your overall risk tolerance.

 

Risk tolerance is not easily measured. It depends on a host of individual, sometimes intangible, factors, including emotional reactions and past experiences.  However, the process of measuring risk tolerance has come a long way. Decades ago, it may have been gauged by asking investors if they had ever considered perilous activities, like hang gliding or mountain climbing. Today, surveys and questionnaires have been designed to help measure investors’ risk tolerance relative to other investors, depending on the score achieved. An investor might fall on the “risk averse” end of a scale, the “risk tolerant” end or somewhere in between. Risk tolerance tools are also being advanced through the use of psychometrics, a field of study that incorporates psychology and statistics.

 

More important than tools, perhaps, is the input of an experienced professional who knows how to make the most of a risk tolerance assessment. Risk tolerance should be compared with an investor’s risk requirement – the level of risk needed in order to pursue a particular financial objective. An individual with limited risk tolerance but aggressive goals, for example, may need assistance structuring a portfolio that can potentially bridge the gap.

 

Part of our service includes reviewing your risk tolerance. Together we can conduct a risk tolerance assessment and then crosscheck the results against your current portfolio. This interactive process will help determine if you need to change your investment policy or modify your goals.

 

It also will help you sleep better.

 

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.

 

* To unsubscribe from our “market commentary” please reply to this e-mail with    “Unsubscribe” in the subject line, or write us at “mike@schwartzfinancial.com”.