Looking at the Bull

Trying to determine the status of the stock market at any point in time is difficult at best. When the market continues to rise for a sustained period, we call it a “Bull” market, and when it declines for a period of time, it is considered a “Bear” market. The determining factors in most cases are the interval and rate of movement. On average most “Bull” markets last about 39 months. During a bull market, a correction of more than 10% usually occurs once. The question is whether we are still in a bull market or if it has ended, and are we now entering a new one. This is rather important because it can give us a much better idea of what to expect. The bull market that began in March of 2009 has had two corrections of more than 10% (16% and 19%). This has not happened since 1940. Two indications that the bull market had ended were noticeably absent. The April high should have been preceded by a falling advance-decline line of the NYSE Composite. It wasn’t. At that point there should also have been a persistent rise in selling pressure. Again, there wasn’t. A bear market is one defined as a drop of 20% or more from the high of the bull market. The drop from April to October of 2011 was 19.3% (close but not enough). In light of other considerations, it appears that we are 36 months into the same bull market which began in March of 2009. Because it has aged this long, events in the bull market are beginning to indicate that we are coming to the end. Two major examples are a greater selectivity of stocks being purchased, and larger stocks dominating the increase in values while small and medium stocks tend to see a deterioration in value. We are seeing both of these happening now. Looking at all of the above, it appears to me that we are coming to the end of this bull market. Ed Mallon

Inflation on the Rise?

A report released today indicated that inflation is "rising." The report seems to say that the cost of gasoline, in particular, is causing the problem. On closer examination, I wonder about the reality of the rate of inflation. At the end of last year, the annual rate of inflation was 3% for the 12 months ending in December. For the 12 months ending in January, it was 2.9%. To me, it appears that, while inflation is a potential concern, especially to the bond market, it is not out of control and will likely result in no changes to Federal Reserve policies. Still, it bears watching. Ed Mallon

FRB Action

For the past two days, the Federal Reserve Board has generated a great deal of anticipation over its next action. The Chairman of the FRB, Ben Bernanke, has indicated a willingness to be more open with the thoughts shared by the members and will give a longer-term idea of where short term interest rates will be headed. Yesterday, he gave a clear message that the FRB is planning on keeping interest rates low into 2014, and that it does not see inflation as being the problem it was in 2011. This information is important for planning on how to position fixed income investments for the future. A shift from very short term to higher paying intermediate term fixed investments is now likely, as there will be less fear of an upward shift in interest rates that would reduce the value of bonds. The result will also be likely to mean that corporations will be better able to plan capital expenditures that require financing. Both of these should benefit the economy over time. The stock market is responding favorably to this information, which will be good for corporations, business expansion and profits. Ed Mallon

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