THE MARKETS
Wall Street investors are sure a fickle crowd these days.
After dropping 16% between April 23 and July 2, the S&P 500
recouped one-third of that loss last week and rose 5.4%, according
to Bloomberg, July 10. Stocks rose on news that U.S. retail sales
grew at the fastest pace in four years in June and a bullish report
from the IMF projected an upwardly revised global economic growth
rate of 4.6% in 2010, according to CNBC, July 8. Rising optimism
that second quarter earnings reports might be better than expected
also supported stock prices last week, according to MarketWatch,
July 7.
Although the market jumped dramatically, has much changed in the
past week? Maybe, maybe not.
Wall Street observers have a tidy tendency to explain every
movement in the market with an explanation that seems, on the
surface, to be reasonable. Last week's bullish reports on retail
sales, world economic growth, and some earnings pre-announcements
all seem like logical explanations for the big rise in the market.
However, between April 23 and July 2, when the market dropped 16%,
we were reading reports that retail sales were weak, economic
growth was slowing, and we might be heading for a double-dip
recession. Now, a week later, the economy seems to have turned a
corner, right?
In reality, the truth is probably somewhere in between. The
economy may not have been as bad as the 16% market swoon suggested
and it may not be as good as last week's 5.4% pop suggests,
either.
It's good to know what market observers are ascribing to the
market's weekly moves, but as financial advisors, we have to filter
their tidy explanations with a dose of skepticism.
|
Data as of 3/12/10
|
1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
|
|
Standard & Poor's 500
(Domestic Stocks)
|
5.4%
|
-3.3%
|
22.6%
|
-11.1%
|
-2.4%
|
-3.1%
|
|
DJ Global ex US
(Foreign Stocks)
|
4.7
|
-7.1
|
18.2
|
-12.2
|
2.0
|
0.3
|
|
10-year Treasury Note
(Yield Only)
|
3.1
|
N/A
|
3.4
|
5.2
|
4.1
|
6.0
|
|
Gold
(per ounce)
|
0.6
|
9.5
|
32.6
|
22.3
|
23.3
|
15.6
|
|
DJ-UBS Commodity Index
|
2.4
|
-8.8
|
10.6
|
-9.6
|
-4.3
|
2.3
|
|
DJ Equity All REIT TR Index
|
5.5
|
8.7
|
72.3
|
-9.0
|
0.0
|
10.1
|
| 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. |
DOES THE LARGE U.S. BUDGET DEFICIT MATTER?
Below is a chart of our annual budget surplus/deficit for the past
few years.
|
Year
|
U.S.
Surplus/(Deficit) in billions
|
|
1998
|
$69
|
|
1999
|
126
|
|
2000
|
236
|
|
2001
|
128
|
|
2002
|
(158)
|
|
2003
|
(378)
|
|
2004
|
(413)
|
|
2005
|
(318)
|
|
2006
|
(248)
|
|
2007
|
(161)
|
|
2008
|
(459)
|
|
2009
|
(1,412)
|
|
2010
|
(1,500) (projected)
|
Source: Office of Management and Budget
Notice how our budget deficit has soared over the past three
years as the recession took its toll. Surprisingly, it was just
nine years ago that we ran a budget surplus of $128 billion. On a
cumulative basis, the national debt is $13.2 trillion, according to
the Treasury Department. So, should we be concerned that our annual
deficit and national debt are rising dramatically?
Without meaning to be glib, deficits don't matter until they do.
Just ask Greece.
Currently, financial markets are relatively unconcerned about
our debt level. Investors' lack of concern shows up in the fact
that interest rates on government bonds are near historic lows and
the spread between interest rates on inflation-protected Treasury
bonds and regular bonds is a mild 2.3%, according to MSN, July 9.
If investors were concerned about our debt level, they'd send
interest rates skyrocketing (as happened in Greece) and inflation
might rear its head if the government cranked up the printing press
to monetize our debt.
Investors are not alarmed at our large debt level because they
still have confidence that our country will weather the
storm. However, investors could lose confidence if, for example, we
experience some new shock or a "failed" Treasury auction. If that
happens, confidence could dissipate rather quickly and throw our
economy into disarray.
Nobody knows if this will happen or not, but we continue to
monitor interest rates and inflation expectations as early
indicators to help determine if confidence is slipping.
For your convenience the sources
have been listed below:
http://www.bloomberg.com/news/2010-07-10/stocks-in-u-s-rise...
http://www.cnbc.com/id/38146840
http://www.marketwatch.com/story/us-stocks-gain-at-open-led-b...
http://www.reuters.com/article/idUSTRE64B53W20100512
http://www.treasurydirect.gov/NP/BPDLogin?application=np
http://www.gpoaccess.gov/usbudget/fy11/pdf/hist.pdf
http://articles.moneycentral.msn.com/Investing/Extra/3-big-my...
