Monthly Archives: August 2012

Weekly Commentary, August 22nd

The Markets

Like the tortoise beating the hare, the U.S. stock market has been slowly and steadily inching its way up over the past few weeks.

Since touching an intraday low on June 4, the Dow Jones Industrial Average, the NASDAQ, and the S&P 500 index have all rallied more than 10 percent, according to CNBC. In fact, the Dow and S&P 500 have now risen for six consecutive weeks. It feels a bit like a “stealth” rally as volume has been very low and volatility, as measured by the CBOE volatility index, is at its lowest level in five years.

Even Europe is enjoying a strong run. As CNBC reported, “European shares hit 13-month highs, extending their longest weekly winning streak in seven years, amid hopes that euro zone policymakers will work closely to tackle the debt crisis.”

Not everything is going up, though. While improving economic data on the job market, the housing industry, the index of leading indicators, retail sales, consumer purchasing, and consumer sentiment has helped the stock market, it’s done just the opposite to the Treasury market, according to Bloomberg. Prices for the 10-year Treasury just posted their worst four-week drop since December 2010, says Bloomberg. The fall in bond prices – and the corresponding increase in bond yields – suggests traders think the improving economic data may forestall the Federal Reserve from stepping in with another round of monetary stimulus.

Once summer is over and the big Wall Street traders get back from the Hamptons, we’ll get a better read on whether this tortoise-like market will keep inching its way up or decide to take a breather.

Data as of 8/17/12

1-Week

Y-T-D

1-Year

3-Year

5-Year

10-Year

Standard & Poor’s 500 (Domestic Stocks)

0.9%

12.8%

18.8%

13.1%

-0.4%

4.1%

DJ Global ex US (Foreign Stocks)

0.6

5.4

-4.3

3.4

-4.4

6.0

10-year Treasury Note (Yield Only)

1.8

N/A

2.2

3.5

4.7

4.3

Gold (per ounce)

-0.2

2.6

-9.8

20.1

19.7

17.9

DJ-UBS Commodity Index

-0.1

1.7

-10.4

4.6

-2.7

3.5

DJ Equity All REIT TR Index

1.2

16.9

21.9

26.6

3.9

11.4

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.

 

SOMETHING BEGAN IN THE STOCK MARKET 30 YEARS AGO that still has people shaking their heads today. Back on August 12, 1982, the Dow Jones Industrial Average closed at its 1980-82 recession low of 776.92, according to The Wall Street Journal. Around the country, it was just an ordinary day in an otherwise economically challenged economy. But, on Wall Street, it was the beginning of something extraordinary.

Depending on your age, you may remember that back in 1982, the prime lending rate peaked at 17 percent, the unemployment rate was near 11 percent, and inflation was on the way down from the double-digit rates of 1979-1980, according to The Wall Street Journal and the Bureau of Labor Statistics. Demographically, the oldest Baby Boomers were a youthful 36 and just getting ready to unleash their penchant for big spending. Ronald Reagan was President, Paul Volcker was head of the Federal Reserve, and, while an unlikely pair, they were about to make history together.

Reflecting back on the summer of 1982 in a 2009 Wall Street Journal piece, Jason Desena Trennert wrote, “Starting as a trickle, the decline in inflation and long-term interest rates picked up speed that summer, and investors in common stocks began to have confidence that they were being liberated from the shackles of double-digit inflation and interest rates, an innovation-sapping regulatory regime, and a tax code that was antithetical to capital formation.”

Awakening from its slumber the day after August 12, 1982, the stock market took off on an unprecedented 18-year bull market run that saw the Dow Jones Industrial Average rise a spectacular 1,500 percent, according to Bloomberg.

So, here we are, 30 years removed from the start of that great bull market and what do we have to show for it? Well, since that great bull market ended in early 2000, we’ve experienced two harrowing bear markets that saw the broad market decline around 50 percent. And, today, we’re still below the all-time high of late 2007.

Yet, here’s what is extraordinary. Despite the weak markets we’ve experienced since 2000, if you go back to August 1982 and look at the returns for the past 30 years, the market has done extremely well. According to The Wall Street Journal, the total return of the S&P 500 index was a compound 11.3 percent between August 1982 and now. That’s even better than the average return for the entire 20th century, which was 10.1 percent, according to the Journal.

It’s easy to get too caught up in what’s happening today in the markets and lose sight of the big picture. Instead, it’s better to take the long view. While past performance is no guarantee of future results, the past 30 years have shown that patience may be rewarded.

Weekly Focus – Think About It…

“Patience is a bitter plant, but it has sweet fruit.”

Old Proverb

Best regards,

John Raudat

Canoga Wealth Management, LLC

Securities offered through LPL Financial, Member FINRA/SIPC.

* This newsletter was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the named broker/dealer.

* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

* The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices.

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.

* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

* Past performance does not guarantee future results.

* You cannot invest directly in an index.

* Consult your financial professional before making any investment decision

Sources:

http://www.cnbc.com/id/48701551

http://www.bloomberg.com/news/2012-08-18/treasuries-drop-fastest-since-2010-as-economy-blocks-fed.html

http://online.wsj.com/article/SB10001424052970204251404574344230339019304.html

ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt

http://www.bloomberg.com/news/2012-02-06/stocks-least-loved-since-1980s-as-americans-scale-steepest-wall-of-worries.html

http://online.wsj.com/article/SB10000872396390444900304577581660593152608.html?mod=ITP_moneyandinvesting_5

http://www.bartleby.com/346/12.html

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John Raudat is a Registered Representative with, and securities offered through, LPL Financial. Member FINRA/SIPC.

Please remember to contact Private Advisor Group, LLC, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you want to impose, add, to modify any reasonable restrictions to our investment advisory services, or if you wish to direct that Private Advisor Group, LLC effect any specific transactions for your account. Please be advised that there can be no assurance that any email request will be reviewed and/or acted upon on the day it is received-please be guided accordingly. A copy of our current written Disclosure statement discussing our advisory services and fees continues to remain available for your review upon request. Copyright 2011 – LPL Financial. All Rights Reserved.

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Weekly Commentary, August 14th

The Markets

Is the “cult of equity” dying?

Since 1912, stocks have returned on average 6.6 percent per year after inflation, according to Bill Gross, the legendary bond manager from PIMCO. Recently, Gross ruffled some feathers when he wrote that the historic 6.6 percent return “is an historical freak, a mutation likely never to be seen again as far as we mortals are concerned.” Histrionics aside, Gross makes a point that deserves elaboration.

Gross believes that, in the future, less of the country’s wealth will be captured by capital (the financial markets) and more will flow to labor (as higher wages) and government (in the form of higher taxes). For the past 30 years, he said, capital markets were the big winner, as real labor wages and corporate taxes declined as a percentage of GDP. By his analysis, that will start to reverse with the capital markets being on the losing end.

Is Gross right?

Well, his chief critic, Wharton professor Jeremy Siegel, emphatically says no. In an August 2 Bloomberg interview, Siegel made the following three rebuttals to Gross:

1.      The 6.6 percent real return was similar in the 19th century in the U.S., too, so it’s not just a 20th century anomaly or “historical freak.”

2.      Other researchers have discovered non-U.S. equity markets with similar 6 to 7 percent real return averages over the past century, further supporting the idea that the U.S. is not an anomaly.

3.      Often, when the media declares “equities are dead,” that’s a sign a bull market is just around the corner – remember the infamous August 1979 BusinessWeek “The Death of Equities” cover story? Three years later, stocks took off on one of the century’s greatest secular bull markets.

So, who’s right, Gross or Siegel?

It turns out they both could be right. The key is your timeframe. Since markets fluctuate, we’ll likely see periods when the market delivers more than a 6.6 percent real return and other times when it’s less. However, simply buying and holding on for dear life hoping Gross is wrong probably isn’t the best strategy. Rather, rigorous analysis of all the investment opportunities and careful portfolio tweaking could be the solution.

Data as of 8/10/12

1-Week

Y-T-D

1-Year

3-Year

5-Year

10-Year

Standard & Poor’s 500 (Domestic Stocks)

1.1%

11.8%

25.4%

11.8%

-0.7%

4.5%

DJ Global ex US (Foreign Stocks)

2.2

4.7

0.1

2.4

-5.4

6.2

10-year Treasury Note (Yield Only)

1.7

N/A

2.1

3.8

4.8

4.2

Gold (per ounce)

1.0

2.8

-8.7

19.7

19.3

17.7

DJ-UBS Commodity Index

0.2

1.8

-7.5

3.3

-3.1

3.7

DJ Equity All REIT TR Index

-2.3

15.5

30.9

22.6

3.8

11.3

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.

 

COULD THE THREE WORDS “PRIME CHILDBEARING AGE” FORESHADOW the next big up move in the stock market? We’re all familiar with the “Baby Boom” generation and the massive impact they’ve had on society. But, less noticed is their offspring, dubbed the “Echo Boom.” Nearly 80 million strong, “they will be become the next dominant generation of Americans,” according to CBS News.

Today, the number of women in “prime childbearing age” is surging and is at an all-time high. While the recent recession and lingering weak economic environment caused many Echo Boomers to postpone childbirth, this could change quickly if the economy picks up speed.

If this potential pent-up demand for babies actually materializes, we could see a spike in births that helps drive consumer spending, corporate profits, and the stock market higher. This potential demographic trend is one reason to be optimistic about America’s economic future.

Weekly Focus – Think About It…

Making the decision to have a child – it is momentous. It is to decide forever to have your heart go walking around outside your body.

–Elizabeth Stone

Best regards,

John Raudat

Canoga Wealth Management, LLC

Securities offered through LPL Financial, Member FINRA/SIPC.

* This newsletter was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the named broker/dealer.

* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

* The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices.

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.

* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

* Past performance does not guarantee future results.

* You cannot invest directly in an index.

* Consult your financial professional before making any investment decision.

Sources:

http://www.pimco.com/EN/Insights/Pages/Cult-Figures.aspx

http://www.bloomberg.com/video/siegel-on-ecb-decision-stocks-bonds-YhgQ9_jURkOmGiNUaqFgkw.html

http://theguruinvestor.com/2012/08/06/siegel-fires-back-countering-gross/

http://www.businessweek.com/stories/1979-08-13/the-death-of-equitiesbusinessweek-business-news-stock-market-and-financial-advice

http://money.cnn.com/2012/08/09/news/economy/baby-boom-recovery/index.htm?iid=HP_River

http://www.cbsnews.com/2100-18560_162-646890.html

http://www.goodreads.com/quotes/search?utf8=%E2%9C%93&q=making+the+decision+to+have+a+child&commit=Search

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John Raudat is a Registered Representative with, and securities offered through, LPL Financial. Member FINRA/SIPC.

Please remember to contact Private Advisor Group, LLC, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you want to impose, add, to modify any reasonable restrictions to our investment advisory services, or if you wish to direct that Private Advisor Group, LLC effect any specific transactions for your account. Please be advised that there can be no assurance that any email request will be reviewed and/or acted upon on the day it is received-please be guided accordingly. A copy of our current written Disclosure statement discussing our advisory services and fees continues to remain available for your review upon request. Copyright 2011 – LPL Financial. All Rights Reserved.

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Weekly Commentary, August 7th

The Markets

Despite disappointment that central banks in the U.S. and Europe offered no new stimulus programs last week, the U.S. stock market rose for the fourth straight week – thanks to one piece of government news, according to Bloomberg.

This particular piece of news is released on the first Friday of each month and investors eagerly await its arrival as it has the potential to move markets. In fact, this news is so sensitive that news reporters are locked up in the Frances Perkins building in Washington, D.C. for 30 minutes prior to its release with absolutely no contact with the outside world. The reporters have 30 minutes to review the report, ask questions, write their story, and then precisely at 8:30 a.m., the government opens the communication gate and the news hits the world.

And, so, last Friday morning, the government released its Employment Situation Report. Within seconds, it was clear that the increase in the number of new nonfarm payroll jobs created in July was much higher than expected and the stock market unleashed a powerful rally, according to MarketWatch. Since employment leads to economic activity, investors pour over this report for clues to the direction of the economy.

Now, here’s where it gets interesting. The data was stronger than expected, but it wasn’t strong enough to prevent the Federal Reserve from adding more monetary stimulus later this year, according to some economists as reported by MarketWatch. In other words, some folks interpreted this as meaning we could have modest economic growth and more monetary stimulus. That’s like a double shot of espresso for the markets.

This is great, right? Unfortunately, it’s not that simple. One month of good employment data does not make a trend and additional stimulus from the Fed is not guaranteed. Even if additional stimulus comes, it could backfire if the market perceives it as too little, too much, or not the right kind. In the end, we’re still left with the hard work of analyzing the economy, the investment opportunities, and doing the best job we can to help you navigate this uncertain environment.

Data as of 8/3/12

1-Week

Y-T-D

1-Year

3-Year

5-Year

10-Year

Standard & Poor’s 500 (Domestic Stocks)

0.4%

10.6%

10.4%

11.5%

-0.6%

5.2%

DJ Global ex US (Foreign Stocks)

1.1

2.5

-11.8

1.3

-6.3

6.4

10-year Treasury Note (Yield Only)

1.6

N/A

2.6

3.6

4.7

4.2

Gold (per ounce)

-1.0

1.7

-4.0

18.6

19.0

17.9

DJ-UBS Commodity Index

-0.4

1.6

-11.7

2.9

-3.4

4.0

DJ Equity All REIT TR Index

0.9

18.2

20.8

28.2

5.0

11.8

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.

 

IS THERE A PARTICULAR 24-HOUR PERIOD IN THE STOCK MARKET that is more important to future stock market returns than any other 24-hour period? Since we asked the question, you might have guessed that the answer is yes.

For many years, the Federal Reserve’s (Fed) monetary policy-making body, called the Federal Open Market Committee (FOMC), has convened at pre-scheduled meetings eight times per year. During these meetings, “The Committee reviews economic and financial conditions, determines the appropriate stance of monetary policy, and assesses the risks to its long-run goals of price stability and sustainable economic growth,” according to the Fed’s website. And, since 1994, the policy decisions from these meetings have been announced to the public at known times.

Two months ago, the Federal Reserve Bank of New York released a study which contained a startling conclusion. The researchers discovered that, “a staggering 80 percent of the annual U.S. equity premium since 1994 was earned in the 24 hours before FOMC announcements.” Further, if you extend the period to three days, i.e., from the day before the announcement to the day after the announcement, the study shows that effectively 100 percent of the return in the S&P 500 index since 1994 has come from this 3-day window encapsulating the FOMC announcement. And, to put it in even more perspective, Yahoo! Finance said, “This pre-FOMC drift has pumped the S&P 500 more than 50 percent higher than it would be without the gains made in the 24-hour period before Fed statements.”

Hmm.

So, how does the Fed explain this anomaly? They end their research paper by saying, “As of this paper’s writing, the pre-FOMC announcement drift is a puzzle.”

Now that this anomaly is known, is there a way to profit from it? Probably not. For one thing, the frequent trading required to capture these gains and then move to cash until the next meeting would be expensive and tax inefficient. And, second, now that the strategy is known, it will likely disappear as investors try to “game” it.

Well, at least we know our tax dollars are hard at work paying researchers to come up with interesting market studies!

Weekly Focus – Think About It…

Adversity, if you allow it to, will fortify you and make you the best you can be.

–Kerri Walsh, Olympic Gold Medal Champion

Best regards,

John Raudat

Canoga Wealth Management LLC

Securities offered through LPL Financial Member FINRA/SIPC.

* This newsletter was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the named broker/dealer.

* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

* The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices.

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.

* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

* Past performance does not guarantee future results.

* You cannot invest directly in an index.

* Consult your financial professional before making any investment decision.

Sources:

http://www.bloomberg.com/news/2012-08-03/dow-posts-longest-weekly-rally-since-october-after-jobs-report.html

http://www.dol.gov/_sec/media/congress/20120606_Fillichio.htm

http://www.marketwatch.com/story/july-jobs-data-show-some-improvement-in-hiring-2012-08-03

http://www.marketwatch.com/story/hopeful-and-a-hammer-blow-jobs-reaction-2012-08-03?link=MW_story_insert

http://www.federalreserve.gov/monetarypolicy/fomc.htm

http://www.newyorkfed.org/research/staff_reports/sr512.pdf

http://finance.yahoo.com/blogs/breakout/time-fight-fed-111628759.html

http://www.sfgate.com/sports/article/Kerri-Walsh-on-Olympic-volleyball-comeback-3658307.php

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Weekly Commentary, August 1st

The Markets

“Within our mandate, the ECB is willing to do whatever it takes to preserve the euro and, believe me, it will be enough.”

–Mario Draghi, European Central Bank (ECB) President

It’s quite amazing how one sentence from one man can help spark a major rally in stocks, bonds, and the euro currency. Draghi’s comments last Thursday in London represent a significant ramping up of the ECB’s willingness to use its resources to hold the euro together and investors responded enthusiastically. On the day of Draghi’s comments:

  • ·         The euro and the British pound each gained more than 1 percent against the U.S. dollar.
  • ·         Stocks were positive in nearly all European markets.
  • ·         Italian and Spanish indexes each jumped more than 5 percent.
  • ·         The Spanish 10-year bond yield dropped nearly half a percentage point from the day before and the 10-year Italian bond yield was down a similar amount.
  • ·         The S&P 500 index rallied 1.6 percent.

Sources: The Wall Street Journal; CNBC

Between Draghi in Europe and Fed Chairman Ben Bernanke in the U.S., central bankers seem to be exerting an outsized influence on the markets. Normally, you expect markets to roughly trend with corporate earnings.

Speaking of earnings, several high-profile companies including Amazon, Facebook, and Starbucks, fell short on their second quarter earnings numbers released last week, according to CNBC. Overall, earnings for the companies reporting so far this quarter have been a bit on the light side, according to CNBC.

While earnings ultimately matter in the long run, today’s markets seem focused on the support provided by central banks. And, yes, an up market is an up market regardless of what’s propelling it. However, for long-term sustainability, we need the markets to go up based on their earnings growth – not artificial stimulus.

Data as of 7/27/12

1-Week

Y-T-D

1-Year

3-Year

5-Year

10-Year

Standard & Poor’s 500 (Domestic Stocks)

1.7%

10.2%

7.3%

12.2%

-1.0%

4.4%

DJ Global ex US (Foreign Stocks)

0.9

1.4

-16.9

2.3

-6.6

5.8

10-year Treasury Note (Yield Only)

1.6

N/A

3.0

3.7

4.8

4.5

Gold (per ounce)

2.7

2.8

-0.4

19.2

19.6

18.2

DJ-UBS Commodity Index

-1.9

2.0

-13.1

5.1

-3.4

4.0

DJ Equity All REIT TR Index

1.0

17.2

13.6

29.4

4.9

11.3

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.

 

THE BEST AND THE WORST DAYS IN THE STOCK MARKET tend to occur rather close to each other and that has major implications for how to be a successful investor.

While it’s tempting to try to aggressively “time” the stock market and be in on the best days and sitting in cash on the worst days, that’s not a viable strategy. The chart below shows how just a few days each decade made a profound impact on the performance of the market over that decade.

 

 

Decade

Annualized Return by Decade

Return Excluding 10 Best Days

Return Excluding 20 Best Days

Return Excluding 30 Best Days

Return Excluding 40 Best Days

1970s

1.6%

-2.3%

-5.0%

-7.2%

-9.1%

1980s

12.6

7.6

4.6

2.0

-0.4

1990s

15.3

11.0

8.0

6.0

3.0

2000s

-2.7

-9.2

-13.2

-16.9

-19.5

Source: BMO Capital Markets

For example, during the 1980s, the S&P 500 had an average annualized return of 12.6 percent. However, if you excluded the return of the 40 best days during that decade, then the return would have fallen to a negative 0.4 percent. In other words, just 40 days out of that 10-year period accounted for all of the return for the decade. Wow!

Now, you also have to know that missing the 40 worst days during the decade would have a profound positive impact on your performance. But, here’s the rub – it would take perfect foresight to know in advance when these 40 best and worst days would occur. And, of course, none of us have that.

What makes aggressive timing even more difficult is that these best and worst days often happen pretty close to each other. BMO Capital Markets discovered that since 1970, more than 50 percent of the 40 best days occurred within two weeks of one of the 40 worst days! So, imagine this… the stock market has one of its worst 40 days for the decade and you are lucky enough to be sitting 100 percent in cash that day. Now, realistically, after a big drop like that, are you going to have the nerve to jump 100 percent right back in? If you didn’t, you’d miss more than half of the 40 biggest up days since those big up days often occur within two weeks of a big down day.

The lesson here is simple. Markets are volatile and the price of long-term return is enduring the pain of periodic declines.

 

Weekly Focus – Think About It…

“The most important thing in the Olympic Games is not winning, but taking part; the essential thing in life is not conquering, but fighting well.”

                                             –Pierre de Coubertin, founder of the modern Olympic Games

Best regards,

John Raudat

Canoga Wealth Management LLC

Securities offered through LPL Financial, Member FINRA/SIPC.

* This newsletter was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the named broker/dealer.

* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

* The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices.

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.

* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

* Past performance does not guarantee future results.

* You cannot invest directly in an index.

* Consult your financial professional before making any investment decision.

Sources:

http://online.wsj.com/article/SB10000872396390443477104577550710566458228.html?mod=WSJ_hp_LEFTWhatsNewsCollection

http://www.cnbc.com/id/48335105/

http://www.cnbc.com/id/48335982

http://research-ca.bmocapitalmarkets.com/documents/F0D72405-29FD-46E1-A800-3AC70C262AE0.PDF

http://www.psychologytoday.com/blog/here-there-and-everywhere/201207/27-quotes-the-olympics

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