Financial Market Update
StrategicPoint of View®
August 23, 2010
Welcome to the StrategicPoint of View -- a market and economic overview of what occurred last week, what's up for this week, and our commentary on the economy and current market activity in general for “Making Money” listeners.
LAST WEEK
The march of weak data continued, peaking on Thursday with rising unemployment claims, a tepid leading economic indicators number and a Philly Fed index (manufacturing activity) that was expected to rise by 7 and instead fell by 7.7. The rest of the week wasn’t much better: housing starts improved over last month but were below expectations, while the producer price index rose 0.2% after three straight months of declines. (Blame the cost of light trucks which surged, skewing the index higher).
S&P 500: 1,072 (down 0.65% for the week and down 3.86% on the year)
NASDAQ: 2,180 (up 0.32% for the week and down 3.92% on the year)
Dow: 10,214 (down 0.87% for the week and down 2.06% on the year)
US Treasury 10 yr: 2.61% (from 2.68% last week)
Crude Oil (September): $73.46 (from $79.59 last week)
Gold (December): $1,228 (from $1,217 last week)
USD/Euro: $1.2705 (from $1.2750 last week)
THIS WEEK
The end of the home-buyers tax credit will continue to plague the existing home sales number, durables goods orders could give the economic outlook a bit of a boost, jobless claims – which have been steadily rising – will hopefully begin their retreat, and the revision to second quarter GDP should confirm a slowing economic recovery.
COMMENTARY
Destination 95
If you can’t get your money to grow, you might not get your money to last.
Investors are frustrated. They have experienced a decade of declining stock prices, and with the equity indexes down 2-4% year to date, they are worried as well. “If I am going to live to 95,” they fret, “how am I going to get my portfolio to live as long as I do?”
Judging from the equity markets this year, fears about meeting longevity goals might not be eased in 2010. Economic data has returned mixed results as of late, after a steady stream of positive news earlier in the year. Recoveries almost never rebound in a straight positive slope, but Main Street doesn’t tolerate well any hiccup along the way.
Politics could cloud the economic outlook as well. Congress returns from summer recess in a couple of weeks ready to resume finger pointing. Expect diatribes and dire predictions (if you don’t vote for “me”) only to make the economic data appear to be much worse. Then add in the uncertainty over taxes (the potential for the repeal of the Bush tax cuts or selected increases in taxes) and the muddled mess of information will keep the markets guessing as to the best direction to take.
But there is more to a portfolio than the stocks it holds. Bonds have outperformed in 2010, much to the surprise of New Year’s revelers who predicted that treasury interest rates were headed higher. Since April, the yield on the ten year treasury has fallen over 30%, boosting returns to that sector. Corporate bonds of all credit qualities have seen increases in prices as well, and the iShares Barclays Aggregate Bond Index has risen 5.8% during that same period. While the yield curve is flattening, concerns over deflation keep the door open to further declining rates, spread compressions and roll down opportunities. Holding bonds or a variety of bond funds has kept many portfolios from seeing red this year.
At least in the near term, with the Fed committed to keeping interest rates extremely low this year and bond returns falling around the globe, bond prices should hold up during this very volatile period for stocks in the remaining months of 2010. In addition, selectively positioned fixed income holdings can provide opportunities for dealing with future interest rate increases. As with any well-managed investment portfolio, risk diversification should be part of any asset allocation.
Even with the support of bonds, should investors be worried if their returns are very modest this year? After all, most portfolios have not returned to their October 2007 values. How long before that gap becomes a problem?
Looking back and retracing losses is not the real issue at hand. The proper question going forward is: “How much money do I need to have accumulated by the time I start withdrawing?” Or, if you are already retired, “What is the minimum average rate of return I need over time to keep up with my expenses?” Your portfolio returns should match your goals not the S&P 500. Once you know what you need, it becomes a matter of how much risk you want to take to meet those goals, since returns can vary with risk exposure.
Almost everyone’s portfolios need to grow if their money is going to last their expected lifetimes. The mattress won’t get most of us to age 95. But the minimum rate of growth is variable for each person. Knowing what you want to do can be very different from what you need to do…and what you need to do is what matters most. Stick with a plan that is titled Destination 95. You can sleep better at night if you can stop worrying about the daily gyrations of the S&P 500 and focus on what you should and can do to live a long, full life.
Tune in to News Talk 630 WPRO and 99.7 FM daily for our "Making Money Updates". Get the latest market news and our take on the day's events with our market commentary at 8:10am and 5:32pm. For more information, visit www.StrategicPoint.com.
*Past performance is not indicative of future results. Indices are unmanaged and you cannot directly invest in them. The Nasdaq Composite Index measures all NASDAQ U.S. and non-U.S. based common stocks listed on the Nasdaq Stock Market. The S&P 500 index is based on the average performance of 500 industrial stocks monitored by Standard and Poor’s. The data referred to above was taken from sources believed to be reliable. StrategicPoint Investment Advisors has not verified such data and no representation or warranty, expressed or implied, is made by StrategicPoint Investment Advisors.
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