December 3, 2012

Weekly Commentary
December 3, 2012

 
The Markets
 
After all the huffing and puffing of the election, the fiscal cliff, and the Dancing With the Stars season finale, the U.S. stock market ended the month of November within 0.3 percent of where it started, according to The Wall Street Journal.
 
Although the return for the month was basically flat, a chart of the daily returns looked more like a healthy man’s EKG. From the closing high of the month to the closing low, the S&P 500 dropped 5.3 percent. Then, from that closing low to the last trading day of the month, the index rose 4.6 percent, according to data from Yahoo! Finance.
 
Overseas, the markets jumped around, too:

  • In Europe, the Stoxx Europe 600 index rose 2.0 percent on the month – its sixth monthly gain in a row.
  • In China, the Shanghai Composite index fell 4.3 percent in November and is now down about 10 percent for the year.
  • In Japan, the Nikkei Stock Average jumped 5.8 percent on the month to close at a seven-month high.    Source: The Wall Street Journal

 
What’s happening in Japan is rather interesting. The country will hold an election later this month to elect a Prime Minister. The leading candidate, Shinzo Abe, recently said the Bank of Japan should pursue a policy of unlimited bond purchases and zero-to-negative interest rates in order to rev up the moribund Japanese economy (sounds like the U.S.!). Abe’s easy money policy rhetoric helped lead to a roughly 10 percent drop in the value of the Japanese yen against a basket of developed market currencies between June and November 19 of this year and helped propel last month’s 5.8 percent rise in the Japanese stock market, according to Bloomberg and The Wall Street Journal.
 
As last month’s results show, we live in an interconnected world with many moving parts. Even something as simple as a Japanese Prime Minister candidate promoting an easy money policy can move markets dramatically.
 

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, 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.

 
ARE STOCK MARKET RETURNS CLOSELY RELATED TO the overall level of growth in the economy? Logically, it makes sense to think as the economy grows, so will stock prices, and vice versa. Let’s test that hypothesis using historical data.
 
The following table compares the return in the stock market during three different time periods to economic growth during those periods. Two of these periods were weak times for the market and one was strong. They are compared to real growth in the economy (i.e., after removing inflation) and to nominal growth in the economy (i.e., with inflation included).
 

Sources: Bureau of Economic Analysis, Yahoo! Finance
Note: S&P 500 returns exclude reinvested dividends

 
Here are some conclusions from the table:
 
Economic growth – after removing the effect of inflation – has remained remarkably stable at 2.3 percent to 3.3 percent during extended strong and weak market periods dating back to 1966.
Stock prices can rise or fall dramatically during extended periods of time regardless of what’s happening to underlying economic growth.
The high inflation period from 1966 to 1981 – as shown by nominal GDP growing 9.6 percent versus real GDP growing 3.0 percent – did not help stock prices as the S&P 500 index only rose 1.7 percent on average per year excluding reinvested dividends.
A combination of strong stock market returns from 1982 to 1999 (which raised market valuation to an extremely high level) and somewhat slower economic growth helped cause stock market returns from 2000 to 2008 to be quite negative.
The change in the rate of inflation or disinflation can have a major impact on stock market returns. 
This table is a great example of why it’s so important to do research. The logical thought that stock price movements mirror changes in economic growth is not supported by data going back to 1966.
 
Just like you can’t judge a book by its cover, you can’t always evaluate the stock market by taking logical ideas at face value.
 
Weekly Focus – Think About It…
 
“Reason itself is fallible, and this fallibility must find a place in our logic.”
--Nicola Abbagnano, Italian existential philosopher
 
Best regards,
 
Suzanne H. Christian, CFP
 
P.S.  Please feel free to forward this commentary to family, friends, or colleagues. If you would like us to add them to the list, please reply to this e-mail with their e-mail address and we will ask for their permission to be added.
 
Suzanne Christian is a Registered Representative with and 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.

Sources:

 
 

Suzanne H. Christian, CFP ®
LPL Branch Manager

phone 909.625.1052

www.suzanne-christian.com

Email: suzanne.christian@lpl.com

External Links: FINRA | SIPC