THE MARKETS
Former Federal Reserve Chairman Paul Volcker was back in the
news last week as he warned that the financial system needs broad
reform or else we run the risk of another financial crisis.
You may remember Volcker as the cigar-chomping Fed Chairman from
1979 to 1987 who raised interest rates dramatically to try and
break the back of inflation in the early 1980s. He succeeded, but
the price for success was a major recession.
During his speech last week to the Economic Club of New York,
Volcker argued that the Federal Reserve should be a key player in
overseeing the financial system and that they, "should have the
power to dismantle big banks that pose a systemic risk to the
economy," according to CNNMoney.com.
Volcker worries that as the economy continues to heal, the
urgency for reform will fade and that will set the stage for the
next crisis. While we will likely get some type of financial reform
in coming months, we hope that it will preserve the principles that
have made our country so great.
Ironically, on the day Volcker spoke, the S&P 500 index hit
a fresh 52-week high, according to Briefing.com.
|
Data as of 1/15/10
|
1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
|
|
Standard & Poor's 500 (Domestic Stocks)
|
-0.8%
|
1.9%
|
33.6%
|
-7.4%
|
-1.0%
|
-2.5%
|
|
DJ Global ex US (Foreign Stocks)
|
0.3
|
3.0
|
55.9
|
-5.0
|
4.4
|
0.9
|
|
10-year Treasury Note (Yield Only)
|
3.7
|
N/A
|
2.2
|
4.8
|
4.2
|
6.8
|
|
Gold (per ounce)
|
0.1
|
2.2
|
39.3
|
21.6
|
21.7
|
14.7
|
|
DJ-UBS Commodity Index
|
-3.0
|
-0.8
|
24.0
|
-4.5
|
-1.1
|
3.7
|
|
DJ Equity All REIT TR Index
|
-0.1
|
-0.2
|
49.5
|
-13.4
|
1.5
|
10.6
|
Notes: S&P 500, DJ
Global ex US, Gold, DJ-UBS Commodity Index returns exclude
reinvested dividends (gold does not pay a dividend) and the three-,
five-, and 10-year returns are annualized; the DJ Equity All REIT
TR Index does include reinvested dividends and the three-, five-,
and 10-year returns are annualized; and the 10-year Treasury Note
is simply the yield at the close of the day on each of the
historical time periods. Sources: Yahoo! Finance, Barron's,
djindexes.com, London Bullion Market Association. Past performance
is no guarantee of future results. Indices are unmanaged and
cannot be invested into directly. N/A means not applicable or
not available.
BACK IN EARLY MARCH 2009, there was palpable
fear in the markets. Our banking system was on the verge of
collapse, unemployment was skyrocketing, and the stock market was
touching 12-year lows. But on March 10, the collective psychology
changed, the market turned around, and since then we've witnessed
one of the greatest short-term bull markets in history.
What do we do for an encore in 2010?
Before we figure out 2010, we need to understand what drove the
2009 bull market. While it may be a little early to write the
history of 2009, we can make some observations that provide a
framework and context for the great reflation.
With the benefit of hindsight, here are some reasonable
conclusions on what drove the 2009 bull market:
- The Federal Reserve flooded the economy with easy money. This
money had to go somewhere and some of it found its way to the
financial markets.
- With short-term savings rates near zero, investors had to move
out on the risk spectrum (e.g., stocks, commodities, high-yield
bonds) in order to have a chance at higher returns.
- China implemented a massive stimulus program that kept their
economic engine running and that helped goose other countries'
economies.
- There was a one-time re-pricing of risk as investors realized
the world was not coming to an end, so they snapped up stocks that
were perceived as "generational" bargains.
One of the tenets of investing is that there is "no free lunch."
In this case, it means the government cannot endlessly flood the
economy with stimulus. If they try, there may be repercussions such
as unacceptable inflation, a crashing currency, and soaring
deficits.
Here's the key question as 2010 unfolds: Can the economy get on
a self-sustaining growth path without further government
stimulus?
If we are over the hump and the economy is self-sustaining, that
may bode well for the markets in 2010. Conversely, if the economy
still needs substantial government help, investors may get nervous
again. The tug-of-war between investors who believe the former
versus the latter may be the defining dynamic in the 2010 market.
Regardless of which comes to fruition, we'll continue to do our
best to help you meet your long-term goals.
Weekly Focus - Think About It
Our thoughts and prayers are with the people of Haiti and the
relief workers who are trying to help them.
For your convenience the sources have
been listed below:
www.econclubny.org/events/Transcript_volcker2010.pdf
money.cnn.com/2010/01/14/news/economy/Paul_Volcker/index.htm
www.thestreet.com/story/10470393/1/kass-printing-an-important-market-bottom.html
www.boeckhinvestmentletter.com/newsletters/Volume%201.14%20Risk%20&%20Uncertaint...
