Economic Update: The View From 3 Months In

April 24, 2012

Except for those who are still unemployed, 2012 has been a good year so far. The U.S. economy is recovering slowly, and there are many indications it will continue to recover. Markets are up, with the Dow reaching the 13,000 milestone last seen in 2007. Greece hasn’t defaulted. Even unemployment is showing signs of improvement.

The U.S. picture
The consensus prediction is for 2% to 3% economic growth in 2012. That’s better than the 1.7% of 2011, but too slow to quickly cut unemployment from 8.3% to a more acceptable level.

Job creation, nevertheless, is increasing. December, January and February added 244,000 jobs a month, the most since before the Great Recession. Many experts think that productivity growth is maxed out and more hiring is inevitable. Businesses are investing in new equipment after spending the last two years increasing production by working off spare capacity.

Consumers are spending and borrowing again, even for big-ticket items like cars. February auto sales were at the highest since 2008. Housing starts show signs of recovery, spurred by continuing record-low mortgage rates.

So what gives us pause? Oil. Should tensions with Iran turn to war, higher gas prices would dramatically cut consumer spending, and slow the U.S. economic recovery as a whole.

Europe and Asia
Europe appears to have avoided a severe financial crisis, and while its recession is expected to be mild, the United States is feeling the effects. Banks with exposure to European debt, and the global economy as a whole, may be affected if debt restructuring doesn’t go smoothly.

China’s growth is slowing, impacting the global economy and the recovery of almost every nation. Can the Chinese avoid a hard landing on one hand, and avoid inflationary over-stimulation on the other hand? We’ll see.

What we think
We’d summarize the first quarter and the outlook going forward with two words: wary confidence. There might be some slowdown and market volatility. Oil prices will affect the economy. Fixed income has been a haven for investors, but that may be changing. Interest rates are likely to rise, and the 30-year bull market in bonds will become more bearish. And, as always, a diversified portfolio is a prudent hedge against unpredictable events and a good long-term strategy for investors.


Wealth Enhancement Group

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Ahhhh, 13,000!

March 1, 2012

“After bouncing up and down around the 13000 level for a week, the Dow Jones Industrial Average finally closed above that psychologically important mark for the first time since May 2008.”

That’s what The Wall Street Journal says in its online edition about the February 28 market close. But is closing above 13,000 really psychologically important?

The short answer is that for the pros, no, it isn’t. They’re busy drawing conclusions from the facts hiding behind the milestone. The twin specters of U.S. recession and European debt collapse are fading. The Dow is up 22% since October and 6.4% since the beginning of 2012, the strongest rise to start the year since 1998. Will it continue?

On the plus side, there’s another bailout for Greece, rumors of a renewed Federal Reserve bond buyback should the economy show signs of weakness, declines in borrowing costs for Italy and Spain, and a 12-month high in the Conference Board’s index of consumer confidence. On the minus side, the slowing growth rate of corporate profits, fears that China’s real estate bubble will pop, rising oil prices, and the plain fact that stocks have been rising for five months and could be due for a correction.

So the answer to “Will it continue?” is, as usual, maybe.

And if 13,000 isn’t psychologically important for the pros, is it for the Main Street investor? Probably it is. Consider the five-month run-up that led to 13,000. In the past few weeks it has finally brought the Main Street investor creeping back into the market.

Here are some ways the average investor can avoid letting the psychological component override the facts: 

  • Pay attention to valuations, the most fundamental measure that moves stocks.
  • Remain focused on broadly diversified portfolios with exposure to multiple asset classes.
  • Focus on long-term goals and stay invested.
  • Avoid the “herd mentality” of jumping on the most recent investment bandwagon.


James Copenhaver, Director of Investment Management


Sources: Optimism Drives Dow Past Milestone; Main Street’s $100 Billion Stock-Market Blunder

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The Importance of Diversification

February 7, 2012

From year to year the best-performing asset classes can change dramatically. Diversifying investments into different asset classes helps you take advantage of economic cycles, reduce portfolio volatility, and increase the likelihood of consistent returns.

Investment principles

At Wealth Enhancement Group we believe

  • clients need a diversified portfolio to reduce overall risk
  • active investment managers can add value to a portfolio
  • tactical allocation can add value over the long term because economies and markets change
  • investors who want growth should be exposed to broad asset classes, including U.S. markets, international markets and emerging markets

As part of our investment philosophy at Wealth Enhancement Group, we look beyond a single year. We manage for both risk and long-term returns for our clients and we believe that, over time, diversified strategies and portfolios will help you get better returns.


But it’s easy for an investor to look at a single year and focus on the Dow Jones Industrial Average, which tracks 30 large-cap stocks, or on the Standard & Poor’s 500, which tracks 500 mid- and large-cap stocks, and wonder why his/her total portfolio didn’t do as well as those two indices. That’s what happened in 2011, a year marked by market volatility and uncertainty, where investments in other parts of the world performed less well than U.S. investments.

The key is that we use other indices for non-U.S. asset classes, and the active managers we measure performed well within their asset classes.

Looking toward 2012

It’s natural to think that if global economic growth is going to be weak, then investors should avoid stocks. There may, however, still be attractive returns from U.S. stocks, particularly small-caps, and from emerging market equities.

As we move into 2012, we’ll continue to monitor the markets and make timely and appropriate allocation adjustments based on the global economic and political environment.


James Copenhaver, Director of Investment Management



Past performance is no guarantee of future results. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

International and emerging market investing involves special risks such as currency fluctuation and political instability.



4 important “Es” for 2012

January 25, 2012

When looking at 2012, as always, expect the unexpected. But for now, here are four expected influences on the markets: the 4Es.


Europe is potentially entering a recession as a result of its sovereign debt crisis. The continent is our largest trading partner, which means less potential demand for U.S. goods and services to help our own recovery. U.S. companies with businesses in Europe may see a downturn;
U.S. banks and investment portfolios likely face losses from European debt and equities. Most analysts, however, think that markets and companies have already factored in a European recession.

Emerging Markets

China’s expansion is slowing, but whether it will have a hard landing in 2012 remains to be seen. A Chinese downturn would mean lower demand for U.S. commodities, which means lower sales for companies like General Motors, for which China is a growing market. It’s important to remember, however, that emerging market countries have old-fashioned tools like capital controls, regulations and state ownership to help them avoid recession.


Employment is a bright spot for U.S. recovery. Weekly initial jobless claims are now at a rate consistent with ongoing employment growth. Layoff announcements are down sharply, and hiring intentions and online job advertising are back to 2008 levels. Hiring intentions of small business recently matched levels from before the 2008 recession; this is important because firms with fewer than 500 employees account for about half of private sector employment and non-farm private sector GDP.


Markets hate elections because they’re unpredictable.  This being an election year, investors looking for clarity on policies, regulations, and key issues like debt reduction will have to wait until 2013. But history points out the S&P 500 has gone down in only three of the 21 presidential election years since 1928.

Net of the 4Es: uncertainty. There’s also, however, unquestionably more optimism in the country than there was six months ago. We advocate staying invested in a broadly diversified portfolio for the long term; we’ll be watching and evaluating opportunities to manage for both return and risk as the year progresses.

 James Copenhaver, Director of Investment Management



Diversification: The Foundation of Asset Allocation

January 21, 2009

Understanding Diversifiction with Asset Allocation Strategy

Before exploring just how you can put an asset allocation strategy to work to help you meet your investment goals, you should first understand how diversification — the process of helping reduce risk by investing in several different types of individual funds or securities — works hand in hand with asset allocation.

When you diversify your investments among more than one security, you help reduce what is known as “single-security risk,” or the risk that your investment will fluctuate widely in value with the price of one holding. Diversifying among several asset classes increases the chance that, if and when the return of one investment is falling, the return of another in your portfolio may be rising (though there are no guarantees). Neither asset allocation nor diversification guarantee against investment loss.

© LPL Financial, created by Standard & Poors

Securities offered through LPL Financial, Member FINRA/SIPC. Advisory services offered through Wealth Enhancement Advisory Services, a registered investment advisor.

Managing Risk with a Diversified Portfolio

December 22, 2008

Diversified Stock Portfolio

Diversification is a fundamental investment concept that most investors have no trouble understanding. If, for example, an investor owns equal dollar amounts of only two stocks, and one suffers a 50% loss, his or her portfolio has gone down in value by 25%. But if the investor owns ten stocks, and one drops by 50%, his or her portfolio has suffered only a 5% loss.

With a diversified stock portfolio, risk may be reduced because different stocks tend to rise and fall independently of each other. On a broader scale, combinations of different investment assets may help balance out each other’s fluctuations in price, lowering, though not eliminating, the overall risk.

Categorizing risk
The ultimate goal in a diversification strategy is to improve investment performance while managing risk. One way to categorize risk is to distinguish between unsystematic risk and systematic risk.

Unsystematic risk is risk that is specific to a company. Often, this risk involves some kind of dramatic event such as a strike, a fire or some natural disaster. A company’s slumping sales also fall within this category. Diversification among the stocks of many companies reduces unsystematic risk because, of course, it’s highly unlikely that every one of the unhappy events listed above will occur in all companies.

Conversely, some events can affect all companies at the same time. This systematic risk includes such occurrences as inflation, war and fluctuating interest rates—generally, those events that influence the entire economy. Of course, diversification cannot eliminate the likelihood of these events happening. Systematic risk accounts for most of the risk in a diversified portfolio.

A diversified stock portfolio: how much?
One way that academic researchers measure investment risk is by looking at stock price volatility. A classic 1968 study by J.L. Evans and S.H. Archer, “Diversification and the Reduction of Dispersion,” concluded that an investor who owned 15 randomly chosen stocks would have a portfolio no more risky than the market as a whole. This research confirmed earlier advice, coming from instinct and experience, that Benjamin Graham gave to investors in his 1949 book, The Intelligent Investor. Graham recommended owning from ten to 30 stocks to achieve proper diversification.

A study published in 2001 (“Have Individual Stocks Become More Volatile?” by John Campbell, Martin Lettau, Burton Malkiel and Yexiao Xu) suggests that those numbers may be too small. To replicate the risk of the market as a whole, according to the study, the “excess standard deviation” of portfolio returns needs to be brought down to 5%. In the 20 years ending in 1985, an investor could have achieved this goal by owning 20 stocks. But, in the period from 1986 through 1997, the professors concluded that one needed to own 50 stocks to reach the same result!

Choices in diversification
Of course, an investor who invests for income will diversify his or her holdings among different bonds. In this case diversification usually means owing long-, intermediate- and short-term government bonds. Other categories might include, when appropriate, municipal, corporate and, sometimes, high-yield (“junk”) bonds.

It is possible for an entire asset class to do poorly for an extended period of time (as we have seen in recent years). Therefore, it’s a common diversification strategy for investors to spread their money across asset classes—including, for example, stocks, bonds, cash instruments, and real estate—in their portfolios.

Finally, some investors may want to think in global terms. By investing outside of the U.S., investors are addressing the risk of extended bear markets at home. Global investing includes additional risks, however, such as currency fluctuations and political uncertainty.

May we offer our assistance?
Risk always will be a cause for concern. There’s always a fear of the unknown. Still, knowledge and experience can help improve the odds that you’ll achieve success as an investor in the long term.

We’ll be glad to help you develop a strategy that meets your specific needs as an investor. One designed and implemented to take only the risks with which you are most comfortable. We look forward to the opportunity to tell you more.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price. Stock investing involves risk including loss of principal. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not ensure against market risk. Past performance is no guarantee of future results.

Securities offered through LPL Financial, Member FINRA/SIPC. Advisory services offered through Wealth Enhancement Advisory Services, a registered investment advisor.

© 2006 M.A. Co. All rights reserved.
Any developments occurring after January 31, 2006, are not reflected in this article.