The New Milestone

March 12, 2013

The Dow Jones Industrial Average rose above its all-time intraday and closing highs on March 5, ending at 14,253.77. That’s more than 100 points above the 14,164.53 record it hit in October 2007 before the Great Recession. The almost-four-year bull market is the eighth longest in the last 100 years, and the sixth strongest in terms of the return of the S&P 500.

Wow! So what? Or something in between? Here are some perspectives on the market for the long-term investor.

This upward trend for the markets continues against a backdrop of monetary policy decisions and continuous (albeit slow) economic growth. The Fed and other central banks continue to pursue a policy of easy money and low interest rates, and economic growth is unspectacular but solid: corporate earnings and dividends are rising, the U.S. housing market is growing, the unemployment rate is gradually declining, and the auto industry is healthy again.

Low interest rates and low bond yields mean investors seeking income are increasingly turning to stocks. And periodic reminders of continued weakness in the euro zone, like the recent Italian elections, give investors worldwide a reason to move money into the United States. Demand increases price, so the Dow is rising.

Now for two reality checks.

First, since the end of 1994 and the beginning of the 1990s stock boom, consumer prices have risen 55%. The Dow has more than doubled since 1994, but after adjusting for that 55% inflation, it shows no gains since the first part of 1999. Investors planning for retirement have to remember that ignoring inflation overstates the value of future investments and understates the amount of money needed for retirement. Second, the four-year bull market and the “lost decade” that preceded it yielded a total return on stocks less than half the historical norm.

And a reminder.

There’s still a lot of money sitting on the sidelines, and a lot of people who are getting ready to jump in. If you’re one of them, remember that a new all-time high is just a number, so don’t get swept up in an emotional reaction to highs or lows.

The fundamental things apply as time goes by, the first of which is that even the pros can’t time the markets in the short term. You should have a long-term plan that integrates your investments, savings, taxes and risk management. Adjust it periodically as markets and the economy warrant. And, stay invested because investments work; investors don’t.


The Dow Jones Industrial Average is an unmanaged index which cannot be invested into directly.  Past performance is no guarantee of future results.



Does Black Friday Mean Green for Investors?

November 30, 2012

Retail sales during Thanksgiving weekend — the traditional start of the holiday shopping season — climbed 13% as more shoppers hit the stores and spent more money, according to the National Retail Federation, wildly exceeding consensus estimates. The news helped to lift stocks on Friday, making for the strongest week for stocks since early June 2012.

Retail sales matter to the stock market mainly because they reflect the health and sentiment of the consumer and investor [Figure 1], but also because they contribute to the growth of the economy and corporate profits.

Does a Black Friday for retailers assure a green holiday season for investors? Not necessarily; there have been years where positive fourth quarter retail sales did not bring positive results for the stock market. In fact, there is not even much of a relationship between how well holiday sales results fare against forecasts and stock market performance. To illustrate this point, over the past 20 years, the performance of the S&P 500 during the period from Thanksgiving through year-end was about the same (2.7% vs. 2.5%) when retailers exceeded the widely followed forecast from the National Retail Federation compared to when they were in line, on average.

The question of what Black Friday means for investors actually has the relationship backwards; it is instead the gain in the stock market that is the predictor for retail sales during the holiday season. This makes sense since the stock market is one of the best barometers of consumer confidence and, if it is rising, it stands to reason that consumers are feeling a bit more confident and willing to spend.

With the S&P 500 Index having gained 12% this year, it should be no surprise that early reports of sales this holiday season have been solid:
• The National Retail Federation reported Thanksgiving weekend sales up 12.8% over last year. Shoppers spent $59 billion over the weekend, with the average shopper spending $423.
• Online sales trends have been very strong, with sales estimated up 26% from last year on Black Friday. Tight inventories may have forced many to go online in search of favored styles and colors. Strong online sales have prompted shipping companies to issue solid outlooks, with UPS predicting a 6.2% increase over last year and boosting seasonal hiring by 10%. Federal Express is forecasting a gain of 12% between Thanksgiving and Christmas.

What Is Driving All This Demand From Consumers?
• A rising stock and housing market has helped consumers feel wealthier, plus the modest increase in jobs and paychecks may have given consumers the confidence to boost purchases during the holiday season.
• Consumers’ balance sheets look a lot better. The percentage of income consumed by financial obligations, such as a mortgage, rent, auto, and student loans has fallen to a level not seen since well before the financial crisis and is below the long-term, 30-year average.
• Consumers are starting to borrow again. U.S. consumer debt has fallen by about $1.3 trillion since the pre-recession peak, according to the Federal Reserve, with credit card debt being one of the most sharply contracting categories. But in four of the last six quarters, American households’ credit card borrowing has increased after having fallen for 11 consecutive quarters.

Stocks, particularly those of the retailers, have reflected the improving consumer incomes and balance sheets, and now sales may begin to reflect the release of pent-up demand. While stocks are already signaling gains in sales this holiday shopping season, the performance of retailer stocks has been pointing to solid gains with the S&P 500 Retail industry group of stocks posting a gain of 2.4% relative to the decline of -1.8% in the S&P 500 so far during the fourth quarter.

However, one weekend does not make a season. Stocks have slumped so far in the fourth quarter, and retail sales have yet to break out of their slump. The widely watched weekly measure of retail sales from the International Council of Shopping Centers has averaged a relatively consistent year-over-year gain of 2 – 3.5% during the second half of 2012. If sales do begin to accelerate, it may be good news for the economy. A more confident consumer leads to more confidence in corporate America, which may lead to brighter prospects for job and economic growth in 2013.

Good News on Housing

October 5, 2012

The housing market is coming back.


S&P’s Case-Shiller home price index of 20 major metropolitan real estate markets for July is out today, and the good news is both broad and deep. Prices were up 5.9% for the first seven months of the year, their largest year-to-date gain in seven years, and significantly better than increases in 2011 (0.4%) and 2010 (2.1%). Prices rose in 16 of 20 markets compared with a year ago, and while they’re still 30% off their 2006 peak, it’s important to remember how inflated those 2006 prices were.


Even better is the depth of the improvement, as prices increased even in the cheapest homes. The gap between price gains in the high end of the market and the low end has narrowed, and the bulk of the gains come from the bottom and middle tiers. Even though four of the 20 Case-Shiller markets aren’t showing the gains, and Atlanta in particular is lagging, the trend is undeniably positive. Reinforcing it are data that show single-family housing starts well ahead of last year’s pace, existing home sales are up, the inventory of homes for sale is down, and foreclosure activity is slowing.


Rising home prices increase the net worth of home owners. And, as a result, the improved balance sheet has a psychological impact, causing people to feel better about their situation, and this reduces frugality. If their home price increase allows them to refinance at lower rates, the impact is multiplied.


There’s more. The Conference Board recently reported that its consumer confidence index rose in September to its highest level since February. Remember that consumer purchasing drives 70% of the American economy and it dovetails nicely with renewed optimism; the number was well above August’s level and also well above economists’ expectations.


Are we finally seeing the beginnings of a self-sustaining recovery, where the trends reinforce one another and a pattern of economic growth becomes clear? It’s still too early to tell, but it’s not too early to be cautiously optimistic. Growth won’t be a straight line up and there are other important economic factors to deal with, like job growth, but it is encouraging to finally see progress in home prices.