The Market feels a bit… “Toppy.”

5 03 2012

Jonathan N. Castle, CFP®, ChFC®

Where does the time go?  It is already nearly the end of February and it seems like 2012 is speeding along faster than last year!  So far this year, the financial markets have been reasonably good to all of us, with the S&P 500 up about 8.5%, the Dow up 6.6%, and the NASDAQ up an eye-popping 13.9% as of this writing.

The Dow Jones Industrial Index has broken through the psychological barrier of 13,000 – the highest it has been since March of 2008 a few times now.  In fact, the markets have been remarkably – almost eerily – calm for the last 3 months, quietly marching upward, shrugging off the occasional bad news (such as the Greek bailout nearly unwinding last week and the ever increasing tension over oil in the mideast) with little more than an occasional flinch. 

As we have said for the past 8 months, we remain cautiously optimistic.  “Moderately Bullish” is a term that I have used in the past.  Based upon historical behavior of Secular Bear Markets, we expect that over the next 3 years or so, we will see substantial ups (and downs) in the markets with a slight overall uptrend.  

As it pertains to the current rally, we believe this leg of the rally is probably due for a drawback of some kind.  The next chart shows our reasoning for this.  When the market approaches a point where it had difficulty breaking through previously (such as the Dow’s 13,000 level), this is known as “resistance.”  Typically, as a market index approaches a resistance level, it generally will pause, draw back, and then, IF the level is to be broken, will punch through that level to achieve new highs.  Similar to a person drawing back before breaking through a door, the market will generally draw back before “breaking out” to a new level.  As we are at that resistance level now, a drawback would be a natural – even necessary – part of a normal market rally. 

Despite the recent market rally, we do not feel it is time to break out any party hats on a new sustained bull market just yet.  There are a number of reasons to remain cautious about the markets:

  • According to the Investment Company Institute – the total inflows (new money) going into equity (stock) mutual funds from February 1st through February 15th was a little over 4.6 Billion Dollars.  While this seems like a lot, compared to the inflows to bond funds, which netted 15.2 Billion – it was just a trickle.  Clearly, investors are not ready to assume lots of stock market risk just yet, and the recent rally did not have the market breadth that would indicate the start of a new bull market.
  • The price of oil is going up.  Part of the reason is that US refineries shut down every May to retool to EPA requirements, so oil nearly always rises during this part of the year.  However – increased tensions in the mideast are also driving oil prices higher.  Higher oil prices mean slower economic growth.  As businesses must pay more for energy, they spend less on payrolls and other things which drive growth.
  • Europe’s financial situation is still quite a mess.  While it seems that the European Union is working feverishly to keep from imploding – and they may well succeed – the fact is that Europe is already mired in what appears to be a deep recession.  This will have a global impact, slowing growth in emerging markets as well as within the United States.
  • Our National Debt is a significant problem – and only getting worse.
  • We are in an election year, so significant economic policy will likely not be passed until next year.  Given the uncertain outcome of the 2012 elections, it is anyone’s guess as to whether any new policies will be helpful or harmful.
  • The Bush tax cuts are set to expire this year.  This expectation is curbing business spending.
  • And the list goes on… given the recency of the 2008 market crash, investors are not yet hungry enough for returns to take additional risks and dive head first into the markets. 

However – there are numerous reasons to be bullish as well.  Institutional investors are slowly beginning to see the opportunity in stocks – and have publicly stated their plans to acquire more stocks in their portfolios over the next several years in preparation for a future bull market.  Some reasons to own stocks – and to expect the market will go up are: 

  • Stock valuations are more attractive than they have been in decades.  Based upon the price of stocks compared to company earnings, stocks are cheap.  In the past, investors who loaded up on stocks at current valuation levels were handsomely rewarded over the next 10 years.  Institutions know this – and their demand for stocks during this period may well keep the market afloat.
  • We are seeing a new “flurry” of IPO’s (Initial Public Offerings).  New companies – such as Facebook – offering publicly traded stock for the first time.  Historically, when there are a lot of IPO’s, the market does well.
  • We are seeing a significant increase in companies buying back their own stock.  Not only does this activity boost the stock market – but it is also an indication of what company insiders think of the future prospects of their companies.  Who would spend good money to buy their own company stock – unless they believed the company woud do well?
  • Corporations are hoarding more cash than ever.  While initially this might seem a bad sign – it is a an indicator of the huge potential that exists.  Eventually, this cash will be deployed.  When it is – there is enough of it to have an enormous impact upon virtually all parts of the economy.
  • Currently, the dividend yield on the Dow Jones is a very attractive 3.07%.  So, hypothetically if the market only goes up 5%, an investor who owned the Dow Jones would reap over 8% in total return.  It is only a matter of time before return-starved pension funds, institutions, and corporations currently investing in Treasuries earning less than 3% begin to move money to other assets to seek greater returns.  When this begins, the market has the potential to move up very quickly.

This balance between bullish and bearish factors is a normal part of the recovery process, but makes for a challenging investment environment. In summary, we remain cautiously bullish, with an expectation for occasional market corrections which may exceed 20% or more.  Likely, it will feel like taking three steps forward, only to take two steps back.  However, we feel that reasonable gains are available with the correct strategy.  The most successful investors that we have worked with have carefully chosen their risk tolerance, and then invested in portfolios scientifically designed around that risk tolerance – and remained focused on the long term.  

This blog post is not personal investment, financial, or tax advice.  Please consult your financial professional for personal, specific information.  Indexes mentioned are a general barometer of the stock or bond market they represent.  You cannot invest directly in an index.  Past performance is no guarantee of future results.   

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Investment advisory services offered by Paragon Wealth Strategies LLC, a registered investment adviser. 


High Unemployment… Debt Crisis… Inflation… Tsunami… why does the market keep going up?

5 05 2011

By Jon Castle, CFP®, ChFC®

Many times, while working with clients, we get the question,  “WHY are you generally bullish on the market?  All the news I hear is BAD.  How can you possibly think the market is going to keep going up?”

I will get around to answering this question – but bear with me a moment as I wax philosophical.  It has been my experience in working with individual investors saving and working toward retirement – that the most successful investors develop an investment philosophy – a set of guiding principles and beliefs that shape an investor’s decision making process.  This set of principles essentially guides the investor during the darkest times so they can remain disciplined during times of economic and market volatility.

“I think the market is going to go up – so I want to be invested NOW – but not if it goes down,” is NOT an investment philosophy!  An investment philosophy guides an investor’s decisions consistently, based upon their fundamental beliefs about the way markets work.  For example, MY own investment philosophy (not necessarily the right one – just what I happen to believe) can be summed up as follows:

1)  Capitalism – perhaps best described as “Pay Upon Results,” ultimately drives the financial markets.  It creates the impetus for new developments and for entrepreneurs to take risks, to create new businesses or opportunities, to hire people to do work, to think up new goods and services that people will buy.  Without capitalism, there is no opportunity for reward, so no one will take undue risk – and the economy will languish as it did in the old Soviet Union.  Sometimes capitalism gets a little out of control… and can be cruel… thus the need for prudent regulation.  However, it is the best economic system invented so far and is amazingly efficient.

2)  Capital Markets work.  With all of the competition to outdo the other guy – millions upon millions of investors seeking the highest reward for the lowest possible risk creates an environment of extreme efficiency in our Capital Markets.  Just about all known information – and the probabilities of all imagined outcomes- about any particular stock or bond – is very quickly factored into that security’s price.  Any “surprise” information that can significantly give one investor an advantage over another is factored into the price very quickly – usually within seconds of that information becoming public knowledge.  Therefore – most of the time – doing tons of research about any particular stock or bond is a waste of time because the market prices the information faster than you (or a mutual fund manager, hedge fund manager, or other money managers) can do the research.

3)  I do believe that there are those few who have the “gift” and have been able to outperform the general market by some margin.  However, this “gift” is usually fleeting  – numerous studies show if someone has outperformed the market in the past – the odds of them continuing to outperform in the future are miniscule.  More often than not, managers who outperformed merely increased the risk within the portfolio, and pay for that risk later in under-performance.  Picking a money manager (or a mutual fund) who will outperform the market – in advance – is extremely unlikely.

4)  Successful investors focus on what they CAN control instead of what they cannot.  We cannot control fund manager performance.  We cannot control the Fed’s actions, nor can we control the markets.  However, we CAN control costs, the structure of our portfolio, and our own behavior.  So, in general, better and more predictable performance can be achieved by capturing the movement of the entire market and its various sectors – through the use of lower-cost ETF’s, index funds, and institutional “total market” funds – than through individual stock picking, trying to hop in and out of the market based upon tips or media input –  or by using more expensive mutual funds where managers try to beat the market while enduring higher risks, tax inefficiencies, and trading costs.

5)  Above all – manage risk.  If the market gets bumpy and shakes you loose from your philosophy – you have failed.  Likely, you took too much risk and will probably never recoup that risk by reaping the rewards the market has historically given those who structure their portfolios so they can ride out the market’s bumps.  Risk tolerance is best described as the amount of money in your account you can watch disappear (through market fluctuation) without changing your philosophy.  If the market drops 20% – but you freak out if your account drops 10% – then you need to structure your account so it will most likely only drop 9% when the market drops 20%, instead of gambling on when the market will go up and when it won’t.  More often than not your gamble will be wrong.

OK, so that was my investment philosophy in a nutshell.  Now – back to the original question.

With all the bad news – why does the market keep going up?  Aren’t we just setting ourselves up for another disaster?   Personally, I think not.  I could be wrong, but I believe my logic is sound.

First – much of the “bad” news is sensationalized.  Right now, as I write this, the media is just about going bonkers trying to get the Obama administration to release photos of the dead Osama Bin Laden.  Now let’s think about this for a minute.  What real purpose would that serve?  Suppose the photos ARE released:

1)  He isn’t any less dead with the pictures than without.

2)  Pictures can be faked.  People (and countries) who don’t believe he is dead, will believe the pictures are faked.

3)  People who believe he is dead will still believe he is dead.

4)  If the photos are released, the media would get more people either watching their shows, reading their magazines, or logging into their websites to see the pictures.  This would sell more magazines (with the photos), and allow them to charge more money for advertising in those magazines, sell more web banners, and charge higher rates for their commercials!

AHA!  The net worldwide effect of the administration releasing the photos would likely be – the MEDIA MAKES MORE MONEY!!!!  Hmm…

So… let’s apply this logic to the stock market and the economy.  What if the media were absolutely unbiased and did not sensationalize anything?

Responsible Media:  “The preponderance of the data shows that the economy is slowly recovering.  Unemployment is slowly going down.  Generally, economic activity is increasing while housing still continues to lag.  Corporate earnings are healthy and corporations are sitting on mountains of cash which they will likely continue to invest over the next 5 years in new production, jobs, advertising, commerce, or in the stock market.  The Federal Reserve will likely, very slowly, reduce the amount of stimulus in the economy to try to control inflation – but must do it carefully in order not to derail the economic recovery.  (They know this, by the way, since they all have PhD’s in economics and finance).  The dollar is weakening a bit – but a weakening dollar can be good for America because it creates jobs at home (versus being sent overseas) and it allows us to sell American goods overseas more competitively.”  (REPEAT EVERY DAY OVER AND OVER with tiny adjustments… )

BOOOOORRRRRIIINNNNGGGG!  After about the third day, no one would watch that show anymore!  And of course, that show and its network would make no money in advertising.

Now – compare that with OUR MEDIA:

1) “Tsumani causes Nuclear Disaster!!!!  Will this cause a global stock market crash?!?”

2)  “Osama Bin Laden Killed.  EXPECT TERRORIST ATTACKS which may cause a global stock market crash!!!!”

3)  “Initial unemployment claims increased by 0.005% last month!!! Is the economic recovery DOOMED?”

4)  Fed to reduce Quantitative Easing.  Is the economic recovery DOOMED?!?!

5)  Fed did Quantitative Easing which boosted the economy.  Oh, No, we’ve got DEBT!  Is the economic recovery DOOMED?!?!

You get the picture.

 The simple reason the market keeps going up is this:  Investors seek investments which give the highest reward for every unit of risk.  Currently, cash is paying virtually nothing.  Bonds are trading at the highest prices (and lowest yields) in most of our lifetimes – so very little new money is moving into bonds.  There is a TON of cash sitting on the sidelines – and it has to go somewhere.  Slowly, it is making its way to the stock market.  The stock “Market” is driven by supply and demand.  As demand increases, the prices go up to reflect that demand.  Expect occasional bumps as unforeseen events unfold – but in general, our economy is expanding and is likely to continue to recover over the next several years.  The stock market is a “leading” indicator of the economy (investors invest for the future, not for the now), so it will generally rise BEFORE recoveries and will generally fall BEFORE recessions.  This is not new – it is basic economics.

It can be helpful to remember that the stock market NEEDS some uncertainty to do well.  Only when there is cash sitting on the sidelines (as a result of worry or uncertainty) can the markets continue to go up.  It is this very “worry cash” that gets the fed into the markets over time, which, in turn, drives the markets up.  OF COURSE investing is risky – why in the world would there be any significant reward without any risk??  The problem is – once everyone FEELS great about the market – once the last investor FEELS great about the economy and goes “ALL IN,” – then there is no additional cash left on the sidelines.  Thus – there is no further demand to continue to drive the market up.  THAT is when we need to really worry… that event occurred in March of 2000 – at the very height of the tech bubble… when all was well, the economy was booming… monkeys with dart boards could outperform professional money managers… and we all know what happened next.

Disclaimer:  This blog article is not personal tax advice.  Please consult your tax professional for personal, specific tax information.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Investment advisory services provided by Paragon Wealth Strategies, LLC., a registered investment advisor.

Investment Myths and Realities

3 10 2009

By Jon Castle, CFP®, ChFC®

Myth:  A story made up to explain a phenomenon beyond the science of the day. 
As human beings, we all have a tendency to want to believe in myths, legends, or heroes of some sort.  Something about the idea that another person can accomplish superhuman feats strikes an adventurous chord in our breasts.  Imagine what it must have been like to hear stories of the great Babe Ruth, Audy Murphy, Wyatt Earp, and others – back when all we knew of someone or something was what we heard from other people or what we read in books – before television and the internet and a swarm of expose’- hungry media exposed the frailties and failings of even great men and women as soon as they came into the public eye!  Even today, we look for myths and legends and heroes – there is just something romantic and exciting about believing in heroes… and the Loch Ness Monster and Sasquatch and Santa Claus…
I think the fact that we want to believe in myths has a tendency to work against us as investors – causing us to act on beliefs and rules of thumb that often are not true.  Sadly, these actions may be more damaging to our financial futures than we realize.  In this article, I am going to briefly examine 3 of the most common investment myths, discuss the investment truths that academic research has discovered, and discuss our role as financial coaches for our clients as we pursue these financial truths together.
MYTH # 1:  Investment advisors (including mutual fund managers) can add value by exercising “superior skill” in stock selection.  Unfortunately, this is generally FALSE.  According to Morningstar, most money managers do NOT beat their index.  This is not because they aren’t smart or because they don’t work hard, but rather because today’s markets are so efficient that all known information – plus the probabilities of all known outcomes for a company or a stock – are continuously factored in to the price of the stock at any given time.  Rare is the man who can out-think the collective intelligence of millions of investors and consistently identify underpriced securities so as to beat the market.  As a result – depending upon the asset class – anywhere from 60-90% of money managers underperform their benchmarks.
MYTH # 2:  Finding money managers with a great track record  is a reliable method of figuring out which funds will do well in the future.  This too is FALSE.  Unfortunately, according to Morningstar and Baird Research, getting a 4th or 5th “star” rating is often the kiss of death for a mutual fund or money manager.  88% of all mutual funds that were rated a “top” fund (ie awarded their 4th or 5th star) went on to perform below average in the next 10 years.  66% of “top” funds actually performed in the bottom quarter of their peers during the next 10 years!  So picking the managers with the best past performance or the highest “star” rating actually gives us nearly a 90% chance of owning the poorest performers, not the best performers.
MYTH # 3:  Money managers – including investment advisors – are able to utilize market timing to effectively predict up and down markets.  Oh, how I wish this were true.  Unfortunately, it just isn’t.  If the loss of trillions of dollars in the markets during 2008 isn’t convincing enough that market conditions are often unpredictible and even the wisest of money managers do not effectively time the market – consider this:  If you had invested directly in the S&P500 (which you can’t – but suppose you could) from January 1, 1989 to December 31, 2008 – you would have achieved a long-term rate of return of 8.43%. In this scenario, $10,000 would have grown to over $50,000.  However – out of those 5040 trading days – if you missed only the best 5 market days – your return dropped to 6.27%, and your pot shrinks to $33,700.  If you missed only 20 of the best days, your return is now a paltry 2.58% and your $10,000 grows to only $16,600.  Consider the math on this – you could be right 99.6% of the time – and have done better in a savings account!1  The fact that the best days usually followed on the heels of the worst days – makes timing the market even more difficult.  To date – no one has ever been able to successfully and consistently time the market – ever.  Yet every day, financial talk show hosts ask their ‘expert’ guests, “So… what will the market do next?”
This discussion begs the question, “OK, if all these myths are false – then how ARE we supposed to make investment decisions?” 
Beginning soon, PARAGON will begin an exciting series of investor education events – fun, engaging events for our clients and their guests where we examine the most common investor pitfalls, discover the determinants of investor success, and offer the opportunity for all who would like to be a part of this journey to come along for the ride. We will examine each of these myths – and many more – and spell out exactly the steps an investor needs to take in order to shift their personal experience of money and investing from a scarcity mode – characterized by worry and frustration – to an abundance mode – characterized by clarity, focus, and hope for a bright financial future! 
1  Source:  Chartsource, Standard & Poors Financial Communications.  The S&P 500 is an unmanaged index that is generally considered representative of the U.S. stock market.  Past performance is not a guarantee of future events.

This blog is for informational purposes only.  This is neither an offer to purchase nor sell any securities.  All investing involves the potential of loss – including invested principal.  Indices quoted are general barometers of security price movement.  You cannot invest directly in an index.  All information is obtained from sources deemed reliable but not guaranteed.  Past performance is not a guarantee of future performance.  No tax or legal advice is given nor intended.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Investment advisory services provided by PARAGON Wealth Strategies, LLC, a registered investment advisor. 

10245 Centurion Pkwy. N. Ste 105, Jacksonville FL 32256   (904) 861-0093

Focus on Job Reports

7 08 2009

CastleInternetPhotoBy Jon Castle, CFP®, ChFC®

I can’t help but roll by eyes just a bit at the media these days; turning everything into a virtual circus.  Take Squawk Box, for instance – this morning, there was the “Final Countdown” to the jobless numbers that the government was going to release this morning – preceded and followed by a virtual smorgasbord of economists and money managers talking about what the reports mean, are they going to buy or sell stocks, etc.

Ridiculous.  First of all, any economist worth his salt knows that unemployment is a lagging indicator of the economy.  As we approach a recovery (and hopefully a bull market), historically the stock market leads off – then the economy begins its recovery process – then unemployment begins to drop.  This is the cycle that has occurred in 23 of the last 23 recessions on record, and is likely what will occur this time. 

What do we think we can accomplish by trying to make investment decisions on a lagging indicator?  Don’t we invest for what we thing is going to happen – not what a lagging indicator is telling us is happening today – essentially giving us information that is only old news.  “Hey folks – people are getting laid off!!”  No kidding.  So unemployment is on the rise.  Gee… wonder what stock I should buy… I’ve got some inside news that companies are going to lay people off last quarter!


This blog is for informational purposes only.  This is neither an offer to purchase nor sell any securities.  All investing involves the potential of loss – including invested principal.  Indices quoted are general barometers of security price movement.  You cannot invest directly in an index.  All information is obtained from sources deemed reliable but not guaranteed.  Past performance is not a guarantee of future performance.  No tax or legal advice is given nor intended.

Investment advisory services provided by PARAGON Wealth Strategies, LLC, a registered investment advisor. 

10245 Centurion Pkwy. N. Ste 105, Jacksonville FL 32256   (904) 861-0093