Stock Market at a 4-year High… Again…

23 08 2012

While it has been an unusually long pause between market updates this time, I can assure you that we were not asleep at the wheel. In this instance, no news was good news, as the stock market has maintained its generally upward trend for the past several months with only moderate volatility for us to endure.

As of this writing, the United States stock market is approaching the high of 13279 on the DOW and 1419 on the S&P500 that it had previously reached on May 1st of this year, before the 10% correction that we went through during June and July. Since then, we have had generally uninteresting economic news on the domestic front, no real political unrest that has given us pause, and the Europeans continue to struggle through massive debt issues and one of the worst recessions that region of the world has had to face in several decades.

It can be easy to fall into the trap of thinking that “something good” must actually happen for the stock markets to go up. This is actually not the case. Given the fact that bond markets have gone up continually over the last several years, the current prices of bonds are so high, that most investors have begun to realize that future returns of the bond market are likely to be disappointing. We are beginning to see a shift of capital from what is historically an asset of moderate risk and return (bonds) to an asset class that historically has been riskier – but is currently acknowledged to be undervalued (stocks – especially blue chips).

As a result – nothing spectacular is happening in the economy to move us measurably forward, but as money shifts from bonds to stocks (or from sideline cash to stocks) – the price of stocks will tend to move up simply as a result of supply and demand. In other words – beause more and more investors are dissatisfied with the expected returns from bonds in the forseeable future – stocks seem like a more attractive alternative, especially for long-term investors. The current owners of the stocks must be convinced to sell them – and this “convincing” is done by investors paying higher and higher prices for the stocks over time.

Approaching a new or previous high is not without danger, however. Those who have invested for a while also understand that when the market approaches a previous high mark, it may fail to break through – almost as if an invisible lid has been placed upon the market itself. Sometimes, even in bull markets, the market must pull back and “take a new run” at the “lid” to break through. Currently the market does not have a great deal of momentum; while investors are buying stocks, they are not doing so with enough gusto or wild abandon for us to be convinced that a breakthrough will occur. So… a potential correction may be in store for us.

As we have mentioned before, we are of the belief that the stock market will likely remain in a “trading range” for several years – with a slight slant to the upside (just enough to make investing worthwhile, I suspect) but not a roaring bull market that we enjoyed after the last recession. Instead, we are likely to enjoy several months of upmarkets, followed by several months of downmarkets… squeaking out 7 to 8% returns on an annualized basis, and paying for it with a good bit of volatility and lack of market direction. Dividends will likely play a significant role in creating portfolio growth. We have adjusted portfolios to try to maximize investor returns (within risk tolerance) for this scenario, and continue to admonish patience.

Most experts believe that we are unlikely to see any real economic or fiscal news between now and the election. While it is possible that world events may cause unrest, or that some good news may come out of Europe that bolsters markets for a while, in general it seems that most institutional investors are in a “wait and see” mood. Market movements, however, can give some insight into likely election results. A strong stock market during an election year has historically increased Presidential approval ratings and would likely increase the chance of the current President being reelected. If, on the other hand, the market should falter between now and November, incumbent approval ratings are likely to decline, thus increasing the odds of the Romney/Ryan ticket being successful on election day.

Jon Castle

http://www.WealthGuards.com

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  www.WealthGuards.com  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

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Should I Still Invest in a Crappy Economy?

20 09 2011

By Jon Castle, CFP®, ChFC®

It does not seem to matter who the potential investor is – whether they are already retired, are nearing retirement, or are a younger person with quite a bit of time until retirement… the question is often the same.  With interest rates being so low… with the markets unpredictible and volatile – what should I do?  The questions aren’t even really so straight forward as, “why should I invest my money now,” or “should I pay off debt first,” or even any of the other questions that, as a financial advisor for more than 15 years now, I’m used to getting.  The questions I am hearing now seem to have taken on the tone of confusion, despair, and a lack of direction, versus the questions I used to get such as “how should I invest,” or”what type of account – a Roth or a traditional IRA – should I have?”

Yesterday, when talking to a rather successful, nearly retired client on the telephone, she mentioned that she feels that she always has to take two steps backward for every three steps forward, and ideally, she would rather not see her account fluctuate at all once she retires next year.  “Isn’t there just something we can do with our money to earn a steady 6-8% or so with no risk?”  Unfortunately, the answer is NO.  While there might be many product salesmen out there who will try to convince you otherwise – the answer is still NO.   If there were -then all the institutions and large organizations in the world, who spend millions and millions of dollars trying to find or design such assets would have already found them.  A classic example of people and institutions trying to get outsized returns with no perceived risk is the recent mortgage debacle, and we saw how that turned out.

So – back to the original question – With the Economy on shaky footing (to say the least) and with the markets being… unusually volatile, to put it lightly – what should I do?

To answer this question, I had to turn to the history books, tenured academic research, and even some new research – but I think I found the answer.  Do EXACTLY what you have been told to do throughout the years.  Live below your means – save a portion of your income (assuming you are working and saving for retirement) and invest in a fully diversified portfolio designed specifically for your risk tolerance.  In fact – it is having the GUTS to invest during times like these that separate the winners from the… folks who wish they had as much money as the winners.

Last year, Dimensional Fund Advisors tapped into the database held at the Center for Research in Security Prices (CRSP) at the University of Chicago – the nexus of more Nobel-Prize winning research in economics than any other institution on the planet – to identify IF there was a direct correlation between a poor economy (as defined by low GDP) and poor investor returns.  In other words – SHOULD I STILL INVEST IN A CRAPPY ECONOMY?”

The Dimensional Study started by taking all of the world’s developed economies, examining their annual GDP growth from 1971 – 2008, and dividing them into two groups – High Growth, or Low Growth – for each year.  Clearly, much of what we hear on the news is about GDP growth – is our economy growing or not?  The higher the economic growth, the better – as this means reductions in unemployment, increases in personal wages, and, generally, a feeling of well-being, versus the cloud of general malaise that seems to have decended upon the world as of late.

Once the economies were divided into High Growth and Low Growth – the performance of their stock market indices was compared to their GDP Growth.  The question:  Does a poor economy (low GDP Growth) accurately predict poor investor returns?  The question was not – can an investor perform poorly during low-growth times (of course, we know that is possible) – but is there a clear and determinable correlation between a bad economy and a bad investor experience?

Oddly enough – the answer is NO.

                              AVG GDP                      AVG RETURN              Risk (Std Dev)

High Growth               0.92                             12.90%                          23.07

Low Growth               -4.02                            13.52%                          23.04

The data for Emerging Markets was similar, but quite honestly, the data for Emerging Markets only went back to 2001, and I felt this was just too short a time period to draw any reasonable conclusions.

When I first saw the data, I thought… well… this might be a sales pitch just to keep investors invested… we are still looking back only as far as 1971.  What about other periods of lousy growth?  And what about for the US in particular?  I wanted to check the data myself.  So, I delved into the CRSP database myself, using the French and Fama indices that go back as far as 1926, and to the Bureau of Economic Analysis (BEA.GOV) and compared hypothetical investor returns to the GDP growth (or lack thereof) during the 1970’s and during the Great Depression.

One particular period of interest to me was the years from 1972 to 1982.  Yes, this was after 1971, but I wanted to look at it further and in more depth from a portfolio manager perspective instead of just looking at the stock market.  How did it feel?  Remember the oil embargo?  Our defeat in Vietnam? The Cold War?  Carter’s “Misery Index?”  Double Digit Inflation?  During this period of time, the average GDP Growth was only 2.7% – well below the historical average of 3.4%.

The second period of interest was the period of the Great Depression.  Now the Great Depression itself lasted from 1929 to 1941 – but for this particular exercise, I wanted to look at the period starting about 2 and a half years AFTER the crash – starting with the summer of 1932 until the attack on Pearl Harbor, or December 1941 – the long, grinding years of the Depression.  During that period of time, our average GDP Growth was only 2.0% – the longest and weakest period of below-average growth on record for the United States.

My question was – how could today’s investors, using a properly designed, diversified portfolio,  have done during that time?  Were these two periods of time – arguably the worst periods (economically) in the past hundred years – a bad time to be invested?

Assume a relatively simple, domestic portfolio:  T-Bills (15%), 5-Year Treasuries (15%), US Large Stocks (11%), US Large Value, or underpriced, dividend paying stocks (21%), US Small Value Stocks (18%), US Small Stocks (10%), and Very Small, or Micro-Cap Stocks (10%).

Looking at the indices only (remember – there were VERY few mutual funds at the time of the Depression, and certainly no ETF’s,) we can get an idea of how an investor might have done.  The following numbers do NOT account for any fees, commissions, taxes, etc – but we can still draw conclusions.

From the period of 1932 – 1941, the above, simple, diversified portfolio (indices only) would have achieved an AVERAGE ANNUAL return of… wait for it… 19.29%!!  In fact one dollar invested as described above in the summer of 1932 would have grown to about $4.50 by December of 1941.  During the Great Depression!!

From the period of 1972 to 1982, the above, simple, diversified portfolio (indices only) would have achieve an AVERAGE ANNUAL return of… 14.82%!!  One dollar invested as described above in December of 1972 would have grown to about $3.49 by December of 1982.  During the Carter Years and the Misery Index!!

Were there periods of volatility, market corrections, and even stagnation in the investor’s portfolio?  Absolutely – in particular, a sharp market correction in 1936 would have scared out many undisciplined investors, and a particularly unpleasant 18 month bear market from 1973-1974 would have tested investor mettle.  But the facts remain – a fully diversified, properly balanced investor would have been able to achieve significant returns during those times.  In fact – there are a number of economic theories that suggest that investors who have the GUTS to invest (and remain invested) during these uncertain times are the ones who enjoy the GREATEST rewards.  These are the riskiest, most emotionally draining times to invest – as a result, the Capital Markets reward those investors more readily and more predictibly than the comparatively “timid” investors who only remain invested during the “good” times.

Today, the Fed and the International Monetary Fund (IMF) are projecting the US economy’s GDP growth to be about 2.7% for the next two years.  The media harps daily on the miserable shape of our economy, and politicians are using the economy as opportunities to further their agendas.  These are things that we must endure as a people, or change with our votes.

However – it is critical to SEPARATE our concerns about the economy – from our own INVESTMENT POLICY.  The two are NOT necessarily correlated.  A miserable economy – historically – does NOT mean miserable returns for an investor who is disciplined, creates a sound, diversified, low-cost investment STRATEGY with strict risk controls, and then implements it with courage and discipline.  In fact – it is EXACTLY these types of investors who have historically been the winners over the long term.

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This blog article does not constitute legal, tax, or personal financial advice.  Please consult your own financial professional for personal, specific 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.





A drop in the market?

31 08 2009

CastleInternetPhotoTiniest

By Jon Castle, CFP®, ChFC®

Well, it appears that the market euphoria that has driven the major stock indices is about to end for a while.  Not that anyone can foresee the future with any accuracy, but it sort of… feels like the market needs to take a bit of a breather.  After about 15 years or so of managing money and surfing the ebbs and flows of the market, you sort of get a feel for it, I suppose.

Actually, a correction at this point makes sense.  The S&P 500 index had a good run from early July – 167 points from the start of its run at 872 and then finishing up with a high of 1039 last week.  A 19% sprint in only 6 weeks or so makes for a good pausing point here as kids go back to school and Labor Day is just around the corner.

It wouldn’t surprise me a bit if the market didn’t bleed off about 10% or so over the next several weeks… from looking at the charts, it seems like a nice place for it to rest would be about 950 on the S&P – or about 8750 or so on the DOW – by the end of September or early October.  That would put it within a few weeks of being ready for a nice Santa Clause rally into December and maybe even January.

Not that it matters much for sensible investors, though.  Historically, markets trend generally upwards coming out of the latter part of a recession, so the fact that the markets give returns in spurts and lumps is just part of the game.   At this point, we’ve recommended that portfolios be repositioned back to the investor’s natural risk tolerance – a core baseline, if you will.  With a little overweights here and there to take advantage of a cyclical recovery, of course.

Now to control the emotions as the market corrects a bit… that’s always the hard part.  But at least Labor Day means a three-day weekend!

I wonder if we can rename “Labor Day” into “Golf Day?”

 

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

www.WealthGuards.com





More on the CIT conundrum

21 07 2009

CastleInternetPhotoTiniest

By Jon Castle, CFP®, ChFC®

It is with a definite sense of relief that we welcome the news that CIT has reached a deal with some of its major lenders to acquire more financing and to avoid having to file for Chapter 11 bankruptcy protection.  Watching the bond markets today was interesting; short duration CIT bond priced  jumped significantly as investors realized that in all likelihood, bonds maturing before the end of 2009 will likely pay off.

It is also a good sign that this rescue came not from the government, but from private capital.  Either CIT’s lenders felt their backs were against the wall and had to prop up the company to avoid getting less than they would have in a bankruptcy sale, or they truly feel that CIT can restructure itself and become a profitable business again.

Interesting that only a few short months ago, the Fed felt that CIT was viable enough to not only lend them over 2 billion dollars, but also approve their re-registration into a bank-holding company.

Needless to say, we will be closely watching CIT, and also watching closely for any opportunities to exit these positions at a profit if at all possible.  I can’t help but feel that we dodged a bullet and just may not get a second chance in the future.

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   www.WealthGuards.com  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.





CIT and Market Panic

15 07 2009

CastleInternetPhotoTiniestBy Jon Castle, CFP®, ChFC®

Wow!  This has been a really interesting one to watch – if stark terror and really, honestly trying to make a good decision for your clients is what you are into! 

I became aware over the weekend (thanks to 24-7 Wall Street Journal service) that CIT (this is NOT CitiGroup the Bank, by the way) had hired a bankruptcy attorney.  Well, we are holding some short-term CIT bonds; we were able to buy them on an average of 70-80 cents on the dollar several months ago.  Clearly, if the company goes bankrupt, we won’t get 100% on the dollar on the bonds, so… as an adviser we jump in to action… what to do… what to do?  Hold or dump them?  Can we even sell them? 

Government said last year CIT was a pretty safe bet; at least enough to give them some TARP money.  Recently (after we bought the bonds, of course) they are saying that CIT is not “too big to fail” (ie – if they fail, the world won’t end as we know it) and so the feds have been dragging their feet on their conversion to a bank holding company, then transferring assets there, and FDIC insurance, et al. 

Long story short, CIT has a pile of bonds (essentially IOU’s) they have to pay off over the next couple of quarters and think they can’t pay because businesses are not paying up on their leases.  Everyone’s scrambling, maybe they’ll be bought out, maybe they’ll go bankrupt, etc, etc. 

Last news that we have is that they are in talks with the government; the market for their bonds has pretty much frozen up; looks like the only option is to hold the bonds for now.  My guess is that the Obama administration does not want the black eye of being labelled only willing to save big companies and companies with unions and willing to let companies which support small businesses wither and die.  We’ll see.

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   www.WealthGuards.com  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.