Financial Market UpdateStrategicPoint of View®
February 1, 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
GDP came in a better than expected +5.7% for the fourth quarter of 2009, orders for durable goods rose unexpectedly with a rebound in demand for machinery, computers and defense equipment, and consumer sentiment is at a two year high. Only the housing data disappointed. Ford, Amazon, Microsoft, Yahoo, DuPont and Apple surprised to the upside while Qualcomm, Motorola and Proctor & Gamble’s numbers came in lower than expected. China continues to curb lending, India announced it is raising its reserve requirements and the U.S. Federal Reserve confirmed that it will stop purchasing mortgage backed securities in March.
S&P 500: 1074 (down 1.65% for the week and down 3.68% on the year)
Dow: 10,067 (down 1.03% for the week and down 3.46% on the year)
NASDAQ: 2147 (down 2.63% for the week and down 5.38% on the year)
10-year: 3.61% (from 3.60% last week)
Crude Oil (February): $72.89 (from $74.54 last week)
Gold (February): $1,083 (from $1,090 last week)
USD/Euro: $1.3865 (from $1.4085 last week)
THIS WEEK
This will be another strong week of earnings reports: Exxon, Kraft, UPS, Cisco, Emerson Electric and Eastman Kodak are on deck. Economic data will include personal income and spending, productivity, factory orders, ISM reports, and the all important jobs number on Friday.
COMMENTARY
Ben Bernanke was reconfirmed as Federal Reserve Chairman, the President redirected his attention to the economy during his State of the Union message, earnings reports were relatively strong, economic data showed a strengthening economy, and – oh, by the way – the stock market continued its nose dive, falling 6.6% on average from the January 19th highs. What gives? Yes, we have all heard that expectations got ahead of themselves and no news could be good enough this past month to propel the markets forward. But there is more.
Some commentators called the drop in the indices over the last ten days a train wreck. That is because the speed of the decline has been concentrated in a relatively short period of time. (It also doesn’t hurt for the media to embrace “wreck” – an emotionally laden word that can inspire alarm and beef up the ratings.)
In the not too distant past it might take 10 weeks (or even months) – not days - for markets to decline a similar 6.6 percent. On the way down, investors had a chance to digest the information and adjust their portfolios. Nowadays, investors would be wise to stay connected to their investments. Volatility is not going away any time soon, even as the economy embarks on a pattern of slow economic growth. Paying attention helps to avoid the panics and temptations that sudden movements cause.
Over the last few years markets have evolved to increasingly reflect the sentiments of traders and much less the wishes of longer term investors. With high frequency trading, program trading and market timing expanding, daily swings can often reflect momentum more than reason. Many retail investors have remained frozen on the sidelines, as evidenced by the trillions of dollars sitting in cash. Their influence has been waning as their participation fades.
The markets have almost become a “Big Boys” game. Picture a kids party where the older boys (we’ll grant a few females) - congregate in a special room with the latest technological toys and engage in a spirited battle. The younger kids peak in the open door, watching the Big Boys thunder around the playing field in an exciting, boisterous, risky exchange. The younger kids would love to join, but they fear that the Big Boys will crush them if they enter the playing room.
That is how the markets feel to some people: Intimidating. But does that mean you shouldn’t invest? To the contrary, most people with longer term time horizons need to be invested – be it conservatively or more aggressively, depending on their risk tolerance. Your investments should help you keep ahead of inflation and support your desired lifestyle without making you too nervous.
The best way to invest is to make sure you understand the rules and strategies you follow (or hire someone who can do this for you) and be prepared to adjust your holdings to reflect new information as it is unveiled. Avoiding emotional reactions is extremely important, as is not glossing over bad news. In the longer term, markets true up with economic data. Along the way the ride can be bumpy. Pick a strategy that is flexible but helps you stick with your longer term plans.
How far down will the Big Boys take us? It is hard to tell. Many money managers have long been expecting a 5-10% pullback and a consolidation of prices based on economic and company information. Volatility tends to magnify movements either up or down. It is a fickle beast. We can turn around quickly or decline further than expected. What is different about now and 2008 is that the economic system is no longer on the verge of collapse or immediate relapse.
We have tough challenges ahead (de-leveraging, unemployment and the potential rise in interest rates). But we also have opportunities for economic expansion through capital spending, enhanced productivity, continued government stimulus and strengthening economies overseas. A key will be the economic mood – confidence in our political system and our economy. As Robert Shiller pointed out in this week’s New York Times, “an economy works well when people personally identify with it, so their self esteem is tied up with its activities.” Consumer sentiment – as reported this past week - was up last month. That is a start, at least, in the right direction.
Tune into the “Making Money” Show Weekdays at 5:30pm and Saturdays at 9am on AM790 WPRV or through our website, 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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