2011: The Year of Going Nowhere!

2011 was a very volatile year for the stock markets. The high for the S&P 500 was 1370.58 and the low was 1074.77. That is a difference of more than 25% from high to low. This surely reminds us: buy low and sell high, not buy high and sell low. The year started out with the S&P at 1271.87 and, as I am writing this blog, it stands at about 1260, a slight reduction from the beginning of the year. If you had gone to sleep at the beginning of the year and just woke up, you’d think, “Not much happened in 2011.” For those of us who lived through it, we know this was not the case. With job creation looking better, plus consumer confidence rising, the overall economy of the U.S. looks relatively good going forward. Morningstar Inc. reported in August 2011 that since 12/31/26 thru 12/31/10 the economy had 60 up years, 12 with growth between 0% and 10%, and 48 with growth over 10%. During the same period, 24 were down years, with half of them between 0% and -10%. This appears to be one of those down years. Will 2012 be an up or a down year? I am hoping for an up year, but still am concerned about the situation in Europe. Have a Happy New Year! Ed Mallon

Santa Claus Rally

Each year we wait to see if we will have a “Santa Claus Rally” in the markets. If we have one, it’s usually an indicator that the coming year will be a good one. If we don’t get the Santa rally, the following year is usually flat or bad. Given the volatility of the current market, it is hard to tell at any one time whether we are having a rally, but let’s say Santa has shown up to lead the way into 2012! At the beginning of 2011, our expectation (as noted in “Outlook for 2011”) indicated a growth rate in GDP of 2.4% for the year and this appears to be the case. The first quarter GDP growth was 0.5%, second quarter 1.5%, third quarter 2.3% and fourth quarter is likely to be in the rage of 3+%. All in all, not too bad. Unemployment, which stood at 10% at the beginning of the year, is now down in the 8% range as we also predicted. Europe did indeed turn out badly¬¬–much worse than predicted. While the U. S. economy has been faring well, we are concerned about our national debt and the sovereign debt of European countries. The new year should be interesting, as I am sure politics will be part of the economic equation. I’d like to remind everyone that, if you are eligible to make a contribution to your IRA for 2011, do so before April 15th. On a final note for the year, I hope each of you has a happy and safe holiday and that the coming year will bring good health and happiness. Ed Mallon

Thanksgiving

For me this time of the year is a time of reflection and thanks. My grandfather came to this country in the 1870’s with nothing but a strong back. I am the recipient of his and my grandmother’s (who came over as an indentured servant) legacy. As I look back, I think of the Berlin Wall going up; the assassination of a President; a financial meltdown; economic recovery; a Vice President resigning; a President resigning; a financial meltdown; economic recovery; the Berlin Wall coming down! The pattern seems clear to me. We seem to have good times and bad times, we keep going on and get through it all without thinking back about how we did it! My forecast for the future is that we will have more economic recoveries and more financial meltdowns and we will survive and do just fine! I hope you all have a safe and thankful Thanksgiving! Ed Mallon

CD's, Bonds and Stocks

Recently, I was speaking with someone at one of the banks where we do business and asked about their CD rates. In general, I find CDs to be somewhat of an indicator of inflation. Rates are currently being held artificially low by the Federal Reserve’s quest to keep short-term interest rates as near zero as possible. According to the bank, the rate for a six-month CD was 0.2% and gradually increased with the length of the CD’s term to two years, which was 0.5%. Treasury debt runs from zero for a 90-day maturity to 3% if you project it over 30 years*. If you decide to raise the risk and invest in investment-grade corporate bonds, you will have an average return of about 4.58%, with a maturity that is now out to 5.1 years* (in the past, maturity been more like 4.5 years). If you decide you want a fixed investment and are willing to take more risk, you can buy High Yield bonds, which currently average about 7.82% with an average maturity of about 3.91 years*. As you can see, to get a decent return these days, you need to take more risk. But what about US stocks? The good news is that stocks are up in the US at this point for the year to date. The bad news, as we all know, is that volatility has been horrendous, with stomach wrenching drops followed by heady moves up! The overall answer appears to be: diversify, diversify, diversify! One of our clients recently asked why I don’t comment on the 200-day moving average of the DJIA. This has not been a pretty picture for a while, with the DJIA falling below the 200-day moving average in late July and just recovering to a position above the 200- day moving average at the beginning of November, where it now remains. This is a good sign, because it generally points to the stock market overall momentum headed in an upward direction. We will see! Ed Mallon *Statistical data provided by Bloomberg LP

Another Blah Month-End Closing!

Yes, once again, today was another month-end downer for the stock markets. But wait, it was an up month! I sometimes wonder why we bother looking at the indexes and the stock market at all. The level of volatility seems extreme and belies the value of the stocks that are being traded. In any event, today the S&P 500 dropped 2.47%, which is hard to take but is likely a reaction to the exuberance on Thursday when the market took off on the “good news” from Europe. I always think, “Do everything in moderation.” On the good side, we saw the S&P 500 rise 10.8% for the month of October. When you get your monthly statements, they should feel warm and fuzzy compared to the end of September, when they just seemed totally fuzzy! Earnings results are coming in better than I expected and the economy is certainly doing better. In the first quarter, GDP was up 0.5%. In the second quarter it increased to 1.3%. With this past August being a total wipeout , I was hoping to see the 1.3% revisited in the third quarter. Instead, GDP was up 2.5%. That is amazing! Manufacturing in September was up a stunning 4% and an economy that was expected to add no new jobs added 103,000. Unless all of this is bogus, the U.S. economy continues to get stronger. Not a bad place to be at this time! Ed Mallon

Change in Direction

Early Tuesday morning, September 20th I saw a fundamental change in the stock market. What precipitated my real concern was the combination of changing dynamics coming from Asia, the intransigence of world governments and the inversion of supply and demand indicators. In the case of the change in Asia, it was reported that freight and air shipment capacity was being underutilized. The meaning of this is that fewer goods are being manufactured and shipped. This in turn means that the dynamo, that has been Asia, has scaled down dramatically in a very short period of time. At the same time, world leaders, attempting to deal with the debt crisis in Europe, seem stalled. US lawmakers seem unable or unwilling to compromise in a manner that would relieve the strain on consumer confidence that has been in free-fall since late July. Finally, on the technical side, the graph of supply and demand crossed over with demand for stocks dropping while supply increased considerably. This sent a caution signal that would indicate the need to lighten up on stocks and return the funds to more liquid and stable investments. With manufacturing slowing, consumer confidence reduced, government paralysis and technical factors pointing in the wrong direction it seems action is warranted. Although the markets made a turnaround in the latter part of last week and today, the indications for the balance of the year do not provide much solace. When comparing where we were at the end of May and where we are today the forward-looking perspective is that there is a need to be more conservative with funds. This is not anything like I saw in October of 2007, when we moved decidedly to a defensive position, but rather is an attempt to conserve funds to allay investors’ concerns with the turmoil in their statements that have occurred during the past three months. I still believe better days are coming but for now we are in a down draft. Ed Mallon

Stepping up the Market

Since the latter part of July, we have witnessed volatile markets. On many days, the DJIA has changed as much as 300 points. Yesterday (September 12) was not nearly as bad as some days, but as an example, the low point of the DJIA the market was down 167 points from the day before, but closed up 69 points, a change of 236 points. More meaningfully, the market showed a 98% down day at one point yesterday and closed as a 54% up day. If you didn’t tune in until the end of the day, you might have thought “good day in the market.” It is difficult to be a long term investor if you are looking at day to day or even month to month results. If you add to this the media hyping everything that is negative, you can become very depressed. The question that you need to ask is always “is the market getting better or worse?” To answer that question, you need to first look at the ongoing pattern. Many small investors got out of the market on August 8th. Thus far, this has been the bottom point in the current market seesaw. Since then, we have witnessed increasingly higher lows each time the market has dropped. When you see negatives on your account statement for July followed by August, it’s easy to feel bad. If you bailed on August 8th, you should feel sick, because you did exactly the wrong thing at the wrong time. In a Wall Street Journal article on Monday, September 12th, they reported on a study that was done by Prof. Richard Sylla, a financial historian at New York University. Prof. Sylla studied market behavior from 1790 to 2000. “By analyzing patterns detected years ago with two colleagues, he accurately predicted in 2000 the decade of overall declines that haunted investors.” At the request of the Wall Street Journal, Prof. Sylla has made a new forecast. “Better days lie ahead,” he says. If past market patterns hold true, as they did over the last decade, stocks should bottom out during the next few years and begin a recovery. He is not talking about a week, a month or a year, but a decade. Here is the best part. Prof. Sylla says, the DJIA could climb by 84% by the end of 2020 and the S&P could climb by 99% from last Friday’s close. He is expecting a 6.5%, inflation adjusted, real rate of return over the next decade. Is he correct? I don’t know about his numbers, but his attitude of taking the long view is what is so important. Ed Mallon