As we began the week the Dow Jones Industrial Average was still up 7.03% for the year, while the NASDAQ was holding onto a 9.13% gain and the S&P 500 managed to hang on to a 3.5% year to date gain, but concerns about flaggng growth and rising prices extended last week's losses into the final week of trading before the Christmas Holiday. The Dow Jones Industrial Average fell 172.65 points on Monday and all the major indexes lost at least one percent. A speech Sunday night by former Fed Chairman Alan Greenspan added to the market's ill humor. Greenspan said "stagflation", when inflation accelerates and the economy weakens, is a growing possibility, given last week's data showing spiking consumer prices. With inflation on the rise, the Fed, which has reduced the target federal funds rate three times since the summer, might feel less inclined to lower rates again.
Meanwhile, PNC Wealth Management released its tongue in cheek Christmas Price Index based on the items in the song "The 12 Days of Christmas". According to PNC, the total cost of the items in the song is now $19,507.00, which takes into account the 3.5% increase in the Consumer Price Index so far this year. The $395 cost of 5 gold rings reflects the 21.5% increase in the price of gold over 2006. Even though the Fed primarily looks at core inflation, which excludes food and energy price increases, the overall CPI rate of 3.5% is well above their target level of a 1% to 2% rate of inflation.
The market reacted to the Feds 25 basis points cut in interest rates with a thud last week, mainly because traders wanted a 1/2 point cut. It seems like the traders might have missed the bigger point, because historically, the third in a series of rate cuts by the Fed is a charm for the market. In the year after three successive rate reductions by the Fed, the DJIA has gained an average 18%. This has happened 14 times since 1921, according to Ned Davis Research. Stocks have risen with striking consistency after three rate cuts, except in 1930, at the onset of the Great Depression, when the Dow fell nearly 40% that year. Let's hope history is on our side in 2008!
There has recently been a great deal of talk about the possibility of a recession, characterized by two or more successive quarters of negative GDP growth. According to an article in Monday's Wall Street Journal, most economists they have polled put the risk of recession at around 38%, while John Lonski, chief economist at Moody's says, "The odds of a recession right now are just under 50-50." Gary Pollack a Managing Director at Deutsche Bank Private Wealth Management says," The economy will skip a recession because the decline in housing will be offset by increases in exports and government spending." As you can see from the various opinions it is almost impossible to know when or if the economy will slip into recession. Recessions are generally confirmed after the fact, so the best thing investors can do is be aware of the possibility of recession and understand the implications for their investments. Markets usually decline during recessions and assets can be bought at lower prices. If you don't NEED to sell anything during a market downturn, think about adding to your investments.
Overall, the comparison of earnings in the coming year to earnings in 2007 could surprise on the upside, because they will be compared to weaker numbers from the preceding year. Whether we can avoid a recession and have another soft landing, similar to the first quarter of 2007 remains to be seen. As a student of history, I like the odds of a market gain for 2008 in the context of three Fed rate reductions, especially when the mainstream media has begun to talk about the possibility of recession. Enjoy the Holidays and let's hope the markets can stabilize and add to the meager gains for the year.
John Kaighn
Jersey Benefits Advisors
Plug In Profit
John Kaighn's Web Business Review
John Kaighn's Guidance Website
Tuesday, December 18, 2007
Thursday, December 6, 2007
Poised For The Christmas Rally?
Since experiencing the late November 10% market correction, when stocks fell from their October high of 14,164.53 to 12,743.44, investors have been looking for a reason to believe the current bull market was not on its way to extinction. Wednesday's data gave plenty of reasons to believe there is still some upside potential in this market. While the disruptions in the housing and credit markets during the late summer and fall are still very much in the picture, I am sure the Fed has got to feel it has some breathing room, insofar as monetary policy is concerned, going forward.
On Wednesday, the U. S. stock market added 196.23 points for the day after data released in the morning cast a more optimistic light on the U.S. economy, while leaving intact hopes of another interest-rate cut next week. Before the opening bell rang, major stock index futures had extended early gains after ADP reported hiring in the private sector expanded at a faster pace in November, gaining 189,000 jobs after a revised 119,000 jump in October. The latest monthly hike is well above forecasts calling for a rise of 60,000. In another report, the Labor Department said productivity in the nonfarm business sector rose at a 6.3% annual rate in the third quarter, an upward revision from the 4.9% tally a month ago. Also, the government revised unit labor costs down, showing a 2% annual decline compared to a 0.2% drop estimated a month ago, which signals milder inflationary pressure than previously thought. Later in the morning, the Commerce Department said orders for U.S. made factory goods climbed 0.5% in October, its biggest increase in three months. The Institute for Supply Management repoted its nonmanufacturing index declined to 54.1% in November from 55.8% in October, with the drop larger than expected. "The economic news that we got today was quite positive. We saw factory orders go up and we saw the non-manufacturing sector continue to grow," said Peter Cardillo, chief market economist at Avalon Partners.
A great article in the Wall Street Journal recently dicussed some of the lessons that were hopefully learned by investors during this wild year. Dan Fuss, of Loomis, Sayles and Co., stated one of the lessons investors should have learned this year is that "The worst thing you can do is get into frequent asset reallocations. There's a financial cost going from fund A to fund B. The more important cost is that it messes up your thinking about what it is you want to accomplish with these funds". John Bogle of Vanguard Group feels the lesson learned this year is "Don't let your emotions drive your investment program, because you will be thinking of getting in and out. For investors the best rule by and large is to ignore daily moves of the stock market". Jeremy Siegle of the Wharton School of Business opined, "It's very important not to be caught up in the prevaling sentiment, because usually those are not good times to sell when the market is going down. In fact, this is really an illustration of the importance of what we call dollar-cost averaging".
Disciplined, non-emotional investing has been my mantra over the years and is definitely the way to go for investors. Dollar-cost averaging works quite well in volatile markets like we have seen this year, because the chance of buying shares on sale increases when monthly purchases are made in a volatile year. It is fantastic to have such respected business and investment colleagues reinforcing what you've always believed.
John Kaighn
Jersey Benefits Advisors
Plug In Profit
John Kaighn's Web Business Review
John Kaighn's Guidance Website
On Wednesday, the U. S. stock market added 196.23 points for the day after data released in the morning cast a more optimistic light on the U.S. economy, while leaving intact hopes of another interest-rate cut next week. Before the opening bell rang, major stock index futures had extended early gains after ADP reported hiring in the private sector expanded at a faster pace in November, gaining 189,000 jobs after a revised 119,000 jump in October. The latest monthly hike is well above forecasts calling for a rise of 60,000. In another report, the Labor Department said productivity in the nonfarm business sector rose at a 6.3% annual rate in the third quarter, an upward revision from the 4.9% tally a month ago. Also, the government revised unit labor costs down, showing a 2% annual decline compared to a 0.2% drop estimated a month ago, which signals milder inflationary pressure than previously thought. Later in the morning, the Commerce Department said orders for U.S. made factory goods climbed 0.5% in October, its biggest increase in three months. The Institute for Supply Management repoted its nonmanufacturing index declined to 54.1% in November from 55.8% in October, with the drop larger than expected. "The economic news that we got today was quite positive. We saw factory orders go up and we saw the non-manufacturing sector continue to grow," said Peter Cardillo, chief market economist at Avalon Partners.
A great article in the Wall Street Journal recently dicussed some of the lessons that were hopefully learned by investors during this wild year. Dan Fuss, of Loomis, Sayles and Co., stated one of the lessons investors should have learned this year is that "The worst thing you can do is get into frequent asset reallocations. There's a financial cost going from fund A to fund B. The more important cost is that it messes up your thinking about what it is you want to accomplish with these funds". John Bogle of Vanguard Group feels the lesson learned this year is "Don't let your emotions drive your investment program, because you will be thinking of getting in and out. For investors the best rule by and large is to ignore daily moves of the stock market". Jeremy Siegle of the Wharton School of Business opined, "It's very important not to be caught up in the prevaling sentiment, because usually those are not good times to sell when the market is going down. In fact, this is really an illustration of the importance of what we call dollar-cost averaging".
Disciplined, non-emotional investing has been my mantra over the years and is definitely the way to go for investors. Dollar-cost averaging works quite well in volatile markets like we have seen this year, because the chance of buying shares on sale increases when monthly purchases are made in a volatile year. It is fantastic to have such respected business and investment colleagues reinforcing what you've always believed.
John Kaighn
Jersey Benefits Advisors
Plug In Profit
John Kaighn's Web Business Review
John Kaighn's Guidance Website
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