was successfully added to your cart.

Tag

Market Update Archives -

NASDAQ Come Back Why 2015 looks stronger than 2000

By | 2015, Money Moxie | No Comments

business roller coasterThe NASDAQ surpassed 5,000 on March 2, 2015. The last time this tech-heavy stock index hit this level was March 9, 2000. Those were exuberant investment days that would not last forever. Are we destined to repeat the past or is the stock market more stable this time?

Prior to June 1998, there is no record of a company having “.com” in its name. However, there was a dramatic change in the next 18 months as 95 companies changed their names to be “.com” related. One example was Computer Literacy, Inc. It changed its name to fatbrain.com in 1999.

Dr. Michael Cooper, now at the University of Utah, studied what happened to companies that changed their names in 1998 and 1999. He discovered those that had an Internet-related change in name experienced a 74 percent jump in value in just 10 days! This phenomenon was observed regardless of what the company did. Many did not seem to have anything to do with the Internet.1

Let’s go back to our example. In the 10 days surrounding fatbrain.com’s name change, the value of its stock popped a whopping 33 percent!2 Expectations were out of this world.

In 2000, investors celebrated what was then called “The Economy.” In those dot.com days the Internet was all that seemed to matter. Then the NASDAQ hit 5,000 and the exuberance reached a tipping point.

The index only stayed above 5,000 for two days before the bubble burst and a bear market began. By the time the NASDAQ hit bottom in 2002, it had lost more than 75 percent of its value.

In 2015, as the NASDAQ reached its old peak, there was much less celebration. In fact, it raised many questions. Is the market value too high? Is the current bull market too old? Is the economy strong enough to continue?

While some market measurements resemble the past, the foundation looks better now. Corporate profits are three times larger than they were when the NASDAQ first reached 5,000. Then, around 14 percent had profits over $50 million. Now, around 78 percent have surpassed that benchmark.

In 1999, less than 15 percent of companies going public even made a profit. Now, the market is largely dominated by more stable companies like Apple, which made over $44 billion in profit in one year.

Then, the average technology company had been in business only four years. Now, the average for these companies is closer to 13 years.

Bull markets don’t die of old age. The current bull market did turn six years old this month, which for bull markets is above average in age. In comparison, by January 2000 that bull market was over 9 years old. A major change will likely need a catalyst.

The U.S. economy is strong and getting stronger. In the last two years, oil production is up 3 percent globally, but up over 20 percent in the United States. This is pushing down gas prices and according to Bloomberg, a 10 cent drop in gas prices saves U.S. consumers roughly $1 billion. This is boosting confidence, spending, and savings in our country.

The coming year is likely to have its hiccups as investor attitudes shift suddenly and often. This emotional volatility will show up in the numbers as well.

For example, the Dow crossed the psychological level of 10,000 for the first time in 1999. It crossed that level 33 times before what may have been the last time in 2010. The NASDAQ may likewise revisit its historic breakthrough many more times.

Just remember, if you stay invested in a well-diversified portfolio, you should be less affected by the wild roller coasters, especially those focused in one sector like technology or energy.

A diversified portfolio also should perform better over the years. In fact, if you stuck with your well-diversified strategy you probably didn’t have to wait 15 years to get back to old levels. Your diversified portfolio has probably had better returns and reached numerous highs over the last 15 years.

This brings me back to fatbrain.com—a quick search on the Web produced no results for this once hot company!

(1) Michael Cooper, Orlin Dimitrov, and Raghavendra Rau, “A Rose.com By Any Other Name,” Journal of Finance, Dec 2001.
(2) Nick Wingfield, “It Can Become a Pain to Shift Your Name,” Wall Street Journal, March 29, 1999.
This is not a recommendation to purchase any type of investment. Investing involves risk, including potential loss of principal. One cannot invest directly in an index like the NASDAQ. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based on market and other conditions, and should not be construed as a recommendation of any specific security or investment plan. SFS is not affiliated with any companies mentioned above.
Tags: , , , ,

What Happened in 2014?

By | 2015, Viewpoint | No Comments

Major Markets Update

The U.S. economy begins 2015 with the best momentum in over a decade. For years investors have questioned whether tepid growth could overcome the slack caused by the 2008 recession and the collapse of the housing market. Now it is time to move on. The question is whether the U.S. economy is strong enough to pull the world out of its current slowdown.

Emerging

Global Summary

There were plenty of reasons to be afraid of investing during 2014: Russia invaded Ukraine, United States joined a war against I.S. (or ISIS), spread of Ebola, and the quick collapse of oil prices.

Europe’s economy shrunk by 0.1 percent in the second quarter and then grew just 0.1 percent in the third. Japan is experimenting with government stimulus and China is slowing down.

In spite of these fearful events last year, the S&P 500 managed to achieve a double-digit gain for the third year in a row. This had not occurred since the late 1990s when the S&P 500 reached a 10 percent or greater rise 5 years in row.

unemployment

U.S. Employment

Approximately 3 million new jobs were created in 2014—making it the best year for new jobs since 1999. Unemployment improved as well, ending the year at 5.6 percent—the best level since 2008.

The average U.S. consumer spends just about every dollar earned. This spending drives nearly 70 percent of the economy. While debt levels as a percent of income are relatively low, so is wage growth.

Incomes in the United States increased at just 1.8 percent during 2014. With that lackluster change consumers are not likely to boost spending significantly.

Oil

Gas Prices

The global supply of oil is surging thanks to producers in the United States and Canada. Members of OPEC seem unwilling to cut production. This combined with slowing global growth led to an epic 55 percent drop in prices since last June. This means lower prices for consumers.

The average price per gallon in December was just $2.54 and prices have continued to fall in January. The savings per household will likely be between $500 and $1,000 in 2015.

Summary

When it comes to investing in global markets, the winners and losers rotate unpredictably each year. Last year, the winner was U.S. large companies. This year it may be different. This is why including large, small, and foreign investments in your portfolio should help you achieve better results over many years.

*Research by SFS. Data from public sources. This is not a recommendation to purchase any type of investment. Investing involves risk, including potential loss of principal. The S&P 500, S&P 600, Dow Jones Global, and MSCI Emerging Markets are indexes considered to represent major areas of the stock market. One cannot invest directly in an index. Past performance does not guarantee future results. Please see disclosure on opposite page for more detail.
Tags: , , , ,

3 Reasons to Run with the Bulls

By | 2014, Money Moxie, Viewpoint | No Comments

Our current bull market is more than five years old. Since hitting a new high on March 28, 2013, the S&P 500 has continued to reach 67 more records—averaging almost one each week. Is this market too strong to continue or is it too powerful to end now?

Herbert Stein famously said, “If something cannot go on forever, it will stop.” This undisputable fact is profound in its application to life and investing. In other words, planning for growth over a lifetime is reasonable, but a new high every week is an unrealistic expectation.

On March 28, 2013, the S&P 500 stock index reached a new, record breaking high. I wrote about this event in the following Money Moxie article, “Patience is a Rewarding Virtue.” My conclusion then as it is now was to continue to hold on. Making money is what stock ownership is all about. I also pointed out that “The average return following a new high is positive for 1, 2, 3, 6, and even 12 months following the high.” Fortunately for investors that forecast was correct. In the 12 months following that new high the S&P 500 made over 18 percent.

Bulls and Bear

Don’t Fear a Correction
This is an unusually strong time to be investing in U.S. stocks and it will not last forever. The S&P 500 averages one 10 percent correction each year and a few 5 percent drops. This is all it takes to spook some investors, causing them to miss out on the growth that follows.

While short-term events can be shocking, long-term returns are predictable. Investing in a diversified portfolio for long periods of time, such as 10 or 20 years, almost always yields positive results. Whatever happens, hang in there. Once we accept the fact that corrections are a normal part of stock investing we will begin to see them as opportunities to invest.

Indicators Look Good
Bear markets are typically defined as a drop of 20 percent or greater. These large drops are extremely difficult to predict. (Those who do are like broken clocks-correct only twice a day.) However, bear markets have some common threads.

1. The yield curve is the difference between long-term and short-term interest rates. It has turned negative around nearly every bear market in the last 50 years, but it is extremely positive right now.

2. Energy prices matter more than any other price in the world. Oil use has an impact almost ten times greater on the economy than any other commodity. So it is no surprise that oil prices have spiked around the end of bull markets in the last 40 years. (1987 was the only exception!) Right now, oil prices look relatively stable and thanks to growing domestic production there is reason to think it will continue.

3. Consumer spending represents 70 percent of the U.S. economy. On average, Americans are spending nearly everything they make, so we cannot expect much more from them. Improvement will come as the number of unemployed workers drops and as employers raise wages. While watching for increases has been like watching paint dry, it is happening. Momentum is positive in the jobs front.

Conclusion
New market highs come for a reason. The economy is continuing to improve. The most important indicators are pointing in the positive direction. The greatest warning sign in stocks is that returns have perhaps been too good. That alone is only enough fuel for a small correction, not a major bear market. When one of these corrections comes we should try to see it as an opportunity. This is an incredible time to be an investor.

*Research by SFS. Data is from the Federal Reserve Bank of St. Louis. Investing involves risk, including potential loss of principal. The S&P 500 index is often considered to represent the U.S. market. One cannot invest directly in an index. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based on market and other conditions, and should not be construed as a recommendation of any specific security or investment plan.

Tags: , , , , ,

3 Myths of the Market

By | 2014, Viewpoint | No Comments

Every year we find reasons to question the future prosperity of America. We wonder whether investors’ prospects are dimming. Last year, our minds were occupied with government slowdowns and shutdowns. This year, we are more focused on the question, “Has the stock market come too far too fast?” While the problems are real, they should not derail us from our plans. Most difficulties are overcome and the myths of the market are not true. Keeping proper perspective will help us make better financial decisions.

Myth #1: Investing is rigged
The U.S. stock markets are the most efficient in the world. All investors have the potential to build their wealth as they participate in it. The longer we invest in a diversified portfolio, the more likely we are to have success.

There is a related question, “Is investing like gambling?” The clear answer is no. When we invest we purchase part of a company (stock) or a promissory note (bond). We become owners of these and we have rights to future cash flows that may come from them. The risks and outcomes are determined by the free market. If a company is successful then all investors that own it have the potential to benefit.

This does not mean that markets are perfect. There have always been some who try to take advantage of others. However, investors become their own worst enemies when they make poor financial decisions. Saving too little and trading too often are two of the most common mistakes. Save sufficiently and invest wisely to attain your goals.

American Manufacturing

Myth #2: America is broke
The United States is in better shape now than it has been for many years. The unemployment rate is down to 6.3 percent and consumer confidence is up. Workers are expecting raises, and according to surveys of executives it looks like it may actually happen this year. Household debt is at record-low levels and corporations have more cash than ever.

Some people may argue that we don’t make anything in this country. This is false. U.S. manufacturing is up 22 percent since 2009 and near record levels. We have an abundance of natural resources, educated workers, and innovation. We have laws to protect and promote business.

Worries over ballooning government debt (over $17 trillion) are diminishing for now. The expanding U.S. economy has led to greater tax revenue (up 8 percent) and a lower deficit ($306 billion). These numbers may not sound great. We still have a long way to go to reach a surplus so we can pay off some debt, but these are the best numbers since 2007. The future appears brighter.

Myth #3: A market crash is imminent
Herbert Stein famously said, “If something cannot go on forever it will stop.” We all know that when the market stops climbing, it can be painful. Two stock-market crashes in the last 15 years are still vivid in our memories. However, just because stock prices have increased doesn’t mean a crash is coming this year.

What can we expect?
The Dow Jones index had double-digit increases in 2012 and 2013. This has happened more frequently than one might think. In the last 99 years, returns of this magnitude have occurred back to back 22 times. What happens in the year that follows two positive, double-digit years? The average return is a positive 5 percent. That would be a reasonable expectation for 2014.

When we examine critical factors for a healthy market, we see more positives than negatives right now. Of course, there are no guarantees.

Tags: , , , , , , , , ,

Escape Velocity: What Will Fuel Our Economic Breakout?

By | 2014, Money Moxie, Viewpoint | No Comments

Escape Velocity is simply the speed required to escape gravity’s pull. An object on earth’s surface would need an initial speed of 6.96 miles per second (Mach 34) to get out of the gravitational range of the planet.

As we continue to recover from the 2008 recession the question looms; “What will it take to escape the unseen gravitational pull of what is called the new normal economy?”

Slow economic growth has given Americans a feeling that the economy is destined to grow at 1 to 2 percent. The decades-long average prior to the 2008 recession was 3 to 4 percent.

Liftoff

Let us be clear. This article focuses on the economy, not the stock market. The market as measured by the S&P 500 formed a bottom 5 years ago. That index has reached around 50 all-time highs in the last 12 months. From January 1, 2009 to January 1, 2014 the S&P 500 went up over 100 percent.

Should it bother investors that the market has been making new highs? No, making new highs is normal for American stocks. Should we worry that five years is too long for a bull market? No, it is a healthy sign to have long periods of growth interrupted by smaller drops.

The question is “How long can the bull market in stocks last if the new normal continues?” Furthermore, what kind of rocket fuel will propel this economy beyond its current trajectory?

As the Federal Reserve stimulus winds down, something else will have to take its place. The U.S. economy needs to transition from a government-induced to a consumer-driven expansion.

Can consumers afford to spend any more? It has taken a long time, but unemployment levels are getting closer to pre-recession levels (currently 6.7 percent). Household debt payments are at an all time low as a percent of income, which is also really good. Unfortunately, the average income of American households is one economic measure showing no improvement over the last 5 years.

Household income may be the most important ingredient to current growth. It may improve soon. As unemployment numbers get stronger, the labor market will tighten. Employers will raise pay for their workers. When that begins to happen in the U.S. workforce, consumers will finally have more spending power to propel the economy.

While stock returns have been great in recent years, they cannot rise forever without better economic growth. The gravitational pull of the new normal is just too strong. Keep an eye on improving income in the United States. It may fuel the next breakout.

As the Sochi Olympics ended, many eyes turned to the other side of the Black Sea and the threat of war in Ukraine. With each successive turn of good or bad events, our U.S. stock markets1 seem to react in like manner. That begs the question, what impact do wars have on stock markets, and how should an individual react?

To see the impact of war, let’s first examine the most recent war that started on American soil. The impression that many people have is that the recession of the early 2000s started with the terror attacks on September 11, 2001. The reality is that stocks were already on a downward trend when September 11th happened. Yes stocks dropped sharply in the 10 days following that awful event, but once America grasped the reality of the situation, stocks rebounded, recovering the losses directly related to the shock of that event.2

There is a similar pattern for each conflict involving the United States. “In 14 shocks dating (back) to the attack on Pearl Harbor in December 1941, the median one-day decline has been 2.4%. The shocks, which also include the September 11th terror attacks and the 1962 Cuban missile crisis, lasted eight days, with total losses of 7.4%…The market recouped its losses 14 days later.”3

Similar patterns of decline occurred during several Middle Eastern conflicts such as Desert Storm in 1991, the Iraq War in 2003, and the Syrian Conflict in 2011. Leading up to each of these events, the market dropped, but recovery happened shortly thereafter.4
Mark Luschini, the Chief Investment Strategist for Janney Montgomery, put it this way, “It’s not that it’s welcome, but once it gets underway, you can quantify what the situation might look like. When you’re left in the dark about when it will start, what will be the result, it gives investors trepidation.”5

Short-term shocks to the system cause short-term consequences for the stock market and the economy. On the other hand, major periods of conflict can have more lasting effects on the economy and the stock market.

One of the most harmful economic effects of war is a supply shock. A major shock in the supply of goods or labor can severely impact economic productivity. Sources of these setbacks include economic sanctions, manufacturing destruction, infrastructure damage, etc. This has not been a factor of major concern within the United States as it has been a long time since there has been a war fought on American soil.

Public opinion supports the belief that war and its associated spending creates positive economic outcomes for the U.S. economy. This is mostly due to the higher GDP growth that was exhibited during conflict periods like World War II, the Korean War, the Vietnam War, and the Cold War. The only outliers have been the Iraq and the Afghanistan wars.6

8 Million

While war tends to generate some positive economic benefits, it is more of a mixed bag for stock markets. “During WWII stock markets did initially fall but recovered before its end, during the Korean War there were no major corrections while during the Vietnam War and afterwards stock markets remained flat from the end of 1964 until 1982.”7

Another typical impact of major conflicts is inflation. This is due to the increase in government spending through various financing methods. “While inflation may be good for reducing debt burdens, high inflation has many harmful effects, such as wealth redistribution and erosion of international competitiveness.”8

Short-term conflicts typically have a short-lived impact on the stock market. As such they shouldn’t change an individual’s investment philosophy or cause one to “abandon ship.”

A more prolonged conflict may cause an individual to take a more judicious approach by reevaluating his or her goals and making adjustments based on the current market environment. As always, it is prudent to seek advice from an experienced investment professional that can help you plan for and navigate your own voyage through our uncertain world.

*Research by SFS. Data is from the Federal Reserve Bank of St. Louis. Investing involves risk, including potential loss of principal. The S&P 500 index is often considered to represent the U.S. market. One cannot invest directly in an index Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based on market and other conditions, and should not be construed as a recommendation of any specific security or investment plan.

Tags: , , , , , ,

Powerful Performance

By | 2014, Money Moxie, Newsletter, Viewpoint | No Comments

Economic growth in the United States was slow last year as the federal government dropped one potential bomb after another. However, none of these exploded and U.S. stocks had their best year since 1997. With all this positive momentum would it be too much to ask for an encore?

In January we escaped a close call with the fiscal cliff. Then came sequestration. By May, Ben Bernanke had dropped another bomb: tapering. Before the end of 2013 we endured a government shutdown.

Duds

Interest rates shot up last year with fear the Federal Reserve (Fed) would slow its bond-buying program. In 2014, this action is slated to become a reality.

Each month the Fed plans to slow its purchases by $10 billion. As it does, let’s keep in mind that any purchase is extra stimulus to the economy. The Fed is still flooding the economy with money. Some may compare this to pushing on a string, but the last few years have helped validate the phrase “Don’t fight the Fed!”

As the Fed becomes less involved as a driver of economic growth we may see more ups and downs in the stock market. In all likelihood, the coming year will be more volatile than last year.
When the next drop comes, let’s keep in mind that it is perfectly normal even in a healthy market to have some hiccups. A fall of 10 percent in stock markets occurs on average about once a year. These drops can even be healthy for long-term growth.

According to the Wall Street Journal, strategists believed the economy would slowly improve and the market would rise 8.2 percent in 2013. It rose 30.
This year, the economy is expected to grow faster, but predictions for stocks are more moderate.

The driving forces of growth should be similar. Domestic energy production is still rising. The housing recovery is underway. Employment is improving. Wages are expected to rise and changes in consumer spending are trending in a positive direction.

Improving economic growth does not necessarily mean more stellar stock returns. Sometimes the two can be out of sync as investors look to the future for something to get excited about. Nevertheless, stocks and the economy are closely related and the economy is still heading in the right direction for now.

Tags: , , , , ,

Shutdown Showdown Can’t Sink Stocks

By | 2013, Money Moxie, Newsletter, Viewpoint | No Comments

In October, the U.S. Government operated under a partial shutdown for 16 days. During that time only those federal employees determined to be essential were working. Up to 850,000 federal workers were sent home to wait for an agreement between Democrats and Republicans. National parks were closed. Economic reports were delayed. Consumers were worried. Investors were . . . optimistic?

From October 1st – October 16th, the time period when the federal government was shutdown, the S&P 500 gained 2.38 percent. This was a shockingly positive outcome in what might have been viewed as a dire financial situation. Let’s put the number in perspective. If it were somehow possible for the stock market to continue at that 2.38 percent rate for an entire year, the annual return would be 63 percent. We all know that would be absolutely crazy and it raises some questions.

Why is it important to look at the impact now that the shutdown is over? The current law, passed on October 16th, only keeps the government running until January 15, 2014. In other words, another shutdown could be right around the corner. (The debt limit is expected to be reached on February 7, 2014.)

Why were investors feeling so good during the shutdown? The main reason is likely to be that Wall Street always assumed that the shutdown would be temporary. Eventually politicians would come to an agreement. According to the Washington Post there were similar halts in government services in 1995, 1990, 1987, 1986, 1984, 1983, 1982, and 1981.

Did the shutdown save the government money? This one is simple: no. In fact, it cost extra. Furloughed workers were given pay for every day they did not work. That added up to around $2 billion. For example, national park employees were paid even though there was no revenue from visitors. Zions National Park in Utah missed out on approximately 72,000 visitors during the first ten days of closure.

Local governments also took a hit, Utah in particular. The state agreed to send $1.67 million to the federal government to reopen national parks inside the state. It was worth it since the local communities estimated revenue of over $100 million in areas around these parks. As of the time this article was written, the federal government had not paid back the state.

How did consumers react to the halt? Consumer confidence dropped significantly during the shutdown. However, they did not put their money where their mouth was. According to Thomson Reuters, retail sales increased by 3.7 percent in October (compared to October 2012). That would normally be considered good. In light of the shutdown, 3.7 percent seems strong.

Did the shutdown hurt the economy? The overall cost of the shutdown to the U.S. economy has been estimated at $24 billion (source: Standard & Poor’s). How bad is that? It is a little more than one tenth of one percent of GDP—just enough to show up in the numbers when quarterly annualized numbers get reported. However, the long term impact on economic opportunity seems muted. The energy renaissance in the United States continues. Consumers kept spending in October on homes, cars, iPhones, and whatever else they needed. They are likely to do the same in November and on into the future. All these will help job creation to continue just as it has all year.

Will we have another shutdown? The most likely answer is yes. Hopefully it does not happen in 2014. The political fallout alone may be incentive enough to avoid a February shutdown. Recent history tells us that the market will expect a deal and consumers will keep spending no matter what. Therefore, it is safe to conclude that while the possibility of another
shutdown is scary, a short shutdown may not be as negative in the long term to investors. Of course, there is no guarantee.

Tags: , , , , , ,

“The Most Powerful Force in the Universe”

By | 2013, Newsletter, Viewpoint | No Comments

Those who understand interest, receive it. Those who don’t, pay it. As investors, we believe this and we strive to go one step further. We seek to get paid interest on our interest. We call this compounding interest.

Albert Einstein called compounding interest “the most powerful force in the universe” and “the eighth wonder of the world.”

It is this mathematical force that has driven the Dow Jones Index to new highs and to over 15,000 this year.

Like everything in life there is a catch. It takes time to achieve compounding interest and it involves uncertainty.

Time

One of the first questions we ask investors is “What is your time horizon?” In other words, “When do you plan to spend this money?”

This is critical because it may take some time to realize the benefits of compounding interest. On June 30, 1993 the S&P 500 was at 450. Fast forward one year and the return was negative 1 percent. Move forward ten years and the total return was 116 percent. Twenty years later, in 2013, the total return was 256 percent!

It pays to be patient with investments. It pays to keep a long-term perspective.

Uncertainty

The stock and bond markets do not travel in straight lines.  There are days when they rise and there are days when they fall. If we don’t accept the uncertainty, then why would we expect to receive a reward.

As investors, we must accept some risk and we believe that over long periods of time, these markets will reward us.

In the last 50 years, the S&P 500 has gained 2,215 percent. Despite this fact, the market was positive only 42 percent of the months. That sounds like a frightening outcome, but the average return for all months was still a positive 0.6 percent.

The good news is that the longer the time period, the more likely an investor is to achieve growth. Positive returns occurred in 53 percent of the years, in 60 percent of 5-year periods, in 80 percent of 10-year periods, and in 100 percent of 20-year periods.

What can we expect in the future?

I believe there is still room for growth. I believe potential for improvement in technology, housing, energy, and employment could fuel this growth.

I expect that the further we look in the future, the more likely we are going to see opportunities to compound returns.

I believe the Dow Jones Index, which currently is flirting with the 15,000 level, is likely to reach 30,000. In my mind it is not a matter of if, but when.

What does all this mean? As we like to say at SFS, “Now is always the best time to invest.”

Tags: , , , , , , ,

Lessons of the Bitcoin

By | 2013, Executive Message, Money Moxie, Newsletter, Viewpoint | No Comments

Bitcoin is a new form of money. It is 100 percent electronic and it just exploded in popularity. In just 6 weeks a Bitcoin went from $25 to $250. What an exciting time for Bitcoin speculators. Why even question it? This is a new electronic age and the possibilities are endless.

Not so fast! On April 10, 2013, the Bitcoin imploded. In just a few hours the value of a Bitcoin fell from $266 to $76.

What is the problem with Bitcoins? Where do we begin? The synthetic currency has no intrinsic value. It represents ownership of nothing. It is not backed by any government. It is not a commonly accepted form of payment. Its owners could be hacked and robbed, or it could be replaced by a more popular made-up currency. The Bitcoin mania may turn out to be one of the most spectacular bubbles of all time.

The term bubble was first used in the early 1700s to refer to wild price fluctuations associated with the “South Sea Bubble.” Another famous episode was the Dutch tulip mania of 1637. In recent history, we have survived the dot com bubble, the real estate bubble, the oil bubble, and possibly the gold bubble.

Why are we so prone to pricing bubbles? Will they ever end?

Greed: The idea that $100 could turn into $150 tomorrow creates fans. That excitement leads them to forget that it is one of the most volatile ways to gamble. Given that it has no real value, it may be more likely to fall 50 percent than rise 50 percent.

Conformity: When opinions converge on an incorrect idea, we call it groupthink or herd mentality. When money is involved, we call these bubbles, and they are dangerous because they can be costly.What should we watch for when trying to detect a bubble?

(1) Insane predictions (with or without good explanation)

(2) Excessive attention as too many people discuss and act like experts

(3) Repeated use of the phrase “this time is different”

(4) Deviation from normal supply and demand because of manipulation

The U.S. stock market has had a string of new highs over the last few months. This in and of itself is no cause for alarm. Hitting new highs is exactly what stocks are supposed to do. That is how investors make money. (Read “Patience is a Rewarding Virtue” from the  previous issue of the Money Moxie.)

How do we know if stocks are in the process of forming a bubble? There are a few simple reasons why investors should not be overly concerned at this point.

(1) Stocks represent ownership of real companies that have value and can grow in value

(2) Valuations of companies compared to earnings are near historical averages

(3) Fundamental improvements in the economy are taking place that support a rise in the market

Bubbles involve a high degree of risk. One way to avoid unnecessary risk is to watch out for investments that don’t have real value or have deviated too far from their true value. Those values are derived from how much the next person is willing to pay.

On the other hand, stocks market gains can benefit everyone who participates. Stocks represent ownership of something real. Time has shown that carefully investing in a diversified portfolio can yield positive results over time.

Tags: , , , , , , , ,

Patience is a Rewarding Virtue

By | 2013, Money Moxie, Newsletter, Viewpoint | No Comments

What 50 Years of New Highs Looks Like

We have all been taught that the way to make money investing is to “buy low and sell high.” This makes perfect sense, but it is so much easier said than done. The danger in “buy low and sell high” is that it encourages investors to take active risk that may be contrary to their long-term goals. Most investors would do better following a more patient mantra.

Consider the recent highs in the market. On March 5th, 2013, the Dow index closed at a record level: 14,253. The S&P 500 index hit its high on March 28th, 2013, with a close at 1,569. These highs are only exciting to those participating in the growth of the market.

Some may see new highs as a signal to increase risk, others as a reason to decrease it. Keeping in mind that past performance does not guarantee future results, here are some answers to questions asked by the media when such events occur.

Do the new highs matter?
Yes! How else will investors make money? Making new highs is exactly what the market is supposed to do. Sure it doesn’t happen every day or even every year. It took these stock indexes 5½ years to reach their previous highs set on October 9, 2007.

Over the last 50 years, the S&P 500 hit new highs 714 times. It falls frequently, but the long-term trend is up and that is the way it should be.

Can we say that what goes up must come down?
There is always a reason for a rising market, and so a new high is often followed by more highs. The positive momentum and good news often have continued. The average return following a new high is positive for 1, 2, 3, 6, and even 12 months following the high.

Is this time different?
The current bull market is celebrating a birthday this month. (The current bull market began on March 9th, 2009.) It is turning four, which is a long time for a bull to run on Wall Street without interruption.

What could stop the bull?
Consumers are once again financing spending through debt. Their savings have fallen to just 2.6 percent of their income. (See cover story for details.)

Low savings equate to high spending. This is only good over short periods of time. A market rise that goes with it cannot be sustained forever. Eventually, consumers will reach a limit on how much they can borrow and spend.

Human nature is also a constant in the investment world, and it often leads to an over-inflated market as investors become overly optimistic. If it leads to inflation, the Federal Reserve may choose to send interest rates higher on debt.

Are there signs of overheating?
Consumer spending trends may be headed in the wrong direction right now, but they seem far from overextended. In fact, household debt is at historically good levels—the best in over 25 years.

Inflation could become a major concern, but it isn’t right now. North America is on its way to energy independence, possibly by 2020. Take a look at the price of natural gas on your winter heating bills. Prices have been low for energy.

Everyone is beginning to love stocks again. This is a good sign and a reason for caution. Just remember, patience is a rare virtue in the market, and if you have it then you should expect to do better than average. Of course, there are no guarantees.

Tags: , , , , ,