Saturday, April 6, 2013


From the Desk of Joe Rollins

From a wealth-building standpoint, 2013 has been nothing short of great so far. Both the Dow Jones Industrial Average and the Standard & Poor’s Index of 500 Stocks set new all-time closing high records during the quarter. Even though many pundits said in 2007 and 2008 that the financial markets would never recover from the financial meltdown in the United States, once again, they were wrong. From the lows of 2009, both major market indices have recovered completely and set new highs during the first quarter of 2013.

For the month of March, the S&P 500 gained 3.8% and is up a sterling 10.6% for 2013. The DJIA was even better, as it was up 3.9% for the month of March, and is up 12% for 2013. The tech-heavy NASDAQ lagged during the month, but the numbers were still quite good; it was up 3.4% for March, and up 8.5% for 2013.

On October 9, 2007, the S&P 500 reached a high of 1,565; that index closed at 1,569 for the month of March – a new high! The DJIA also reached its prior all-time high of 14,164 on October 9, 2007, and finished the first quarter of 2013 at its new all-time of 14,578. While it’s great that these new highs were achieved, I can’t forget how much wealth was squandered by investors during the intervening six years.

Many investors withdrew their money from the stock market entirely during the 2008 meltdown, and some of those investors have never reinvested. More importantly, there have been countless numbers of investors who have not invested a dime during this six-year period. If I’ve heard it once, I’ve heard a thousand times that some investors will only invest again “once the market recovers.” This is the worst strategy for an investor to take when it comes to wealth-building.

So many investors would be in a better position had they invested on a monthly basis over the intervening six years. Almost all investors can afford to contribute some fixed amount to their investments each month. Unfortunately, so many choose instead to carry large balances in non-interest bearing checking accounts, and more often than not, they invest lump sums at irregular times. The best approach to building true wealth is to invest regularly and consistently, regardless of whether the market is high or low.

We frequently receive inquiries from clients asking if it’s too late for them to take advantage of this stock market rally. So much skepticism has been built over the last six years that it’s hard for the average investor to see how well the market can do when times are good. I am, however, stunned by the investors who keep huge sums of money in non-interest bearing accounts simply because of their fear of the unknown. No one knows what the future will bring, but I foresee no fundamental change in the investing arena today from what I saw three years ago.

Unquestionably, there are many problems in the world, but the economy continues to be slightly higher, earnings continue to be at record levels, and interest rates are unbelievably low. Those three components alone will lead to higher stock prices going forward.

Investors are seemingly unaware of two major economic events that are occurring in the U.S. economy. First, there’s been an explosion in the production of oil occurring in the U.S. unlike anything that’s happened in decades. It’s no longer a misplaced dream to think that we could be energy independent in our lifetime. In fact, there is a high likelihood that the U.S. will become an exporter of oil in the next 20 years. That concept may be hard to imagine given the dependence we have had for the last 30 years on imported oil.

Even though Washington throws up every roadblock known to man for increased energy exploration, it is happening notwithstanding the incompetence that surrounds our government. If federal lands were opened up for energy exploration, the potential for the U.S. to produce all of the oil it needs would come sooner rather than later. Even so, production is reaching all-time levels and oil production is changing the economies of many states. I wonder how many Americans could get higher-paying jobs if these oil exploration efforts were expanded.

Another major positive economic event is that after almost eight years of little progress, the housing market is finally getting its footing to better health. People do not seem to realize how many jobs will be created when the housing industry begins in earnest – not only the construction workers, but also the supply houses, architects, engineers, landscapers, and the list goes on forever…

While this is a limited market set, on my street alone there are at least 10 new houses under construction, but it still indicates that the turnaround in residential construction is beginning. While house prices may not soon reach the exorbitant levels of a decade ago, just like the stock market, house prices will recover. There has been a slow and steady climb of inflation in labor and building materials over the last decade. Unquestionably, when new houses begin construction in earnest, that inflation will be reflected in house prices and will increase the value of existing and new homes.

For the last three years, there has been a Wall Street axiom that has held true. In each of the last three springs, the saying “sell in May and go away,” was realized. We have suffered through spring and summer months where the market drifted down only to rally again at the end of the year. While I don’t expect a major sell-off this summer, it’s perfectly possible for the market to drift down due to a lack of traders actively working over the summer months. However, until there is a pronounced reduction in corporate earnings – or an attempt by the Federal Reserve to increase interest rates – I fully expect to see higher stock prices at the end of 2013 than they are currently.

When I look at all the investment opportunities, I see nothing that rivals the potential gain of the financial markets. With cash paying zero, CDs only marginally above zero, and bonds paying meager returns, there doesn’t seem to be a better choice than equity investing. We talk to clients regularly who are sitting on large cash balances waiting to take advantage of those gains. With excellent corporate earnings, low interest rates and an investing public with trillions in uninvested cash, I see the market going higher rather than lower in the coming months.

As always, the foregoing are my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.

Best regards,
Joe Rollins