Saturday, December 7, 2013

Let the Good Times Roll

From the Desk of Joe Rollins

November has come to a close, and it too proved to be another excellent investment month. 2013 is shaping up to be one of the best investment years in a decade. Aside from all of the constant negative talk about the market and its potential for loss, it has proven to be quite an extraordinary year.

For the month of November, gains were added on top of an already very profitable year. During the month of November, the Standard & Poor’s 500 had a total return of 3.1%, while the NASDAQ Composite and the Dow Jones Industrial Average had an excellent return of 3.7% for the month and the Russell 2000 Small-Cap index gained 4.1% for the month. Through the end of November 2013, the S&P 500 is up 29.1%, the NASDAQ Composite 36%, the Dow Jones 25.5%, and the Russell 2000 is up an astonishing 36.2%. In contrast to those impressive returns, the Barclay’s Aggregate Bond Fund has suffered a 1.7% loss for the year thus far.

November was consistent with the many positive months of 2013. Virtually all of the domestic stock funds were up from 2-4% for the month, while most of the international funds were either down or only marginally profitable. Bond funds, for the most part, were down for the entire month except for the high-yield bond funds which were marginally profitable during November. Like so many months before, the municipal bond funds continued to lose money during November and, for all practical purposes, every municipal bond fund is down for the year.

I am asked almost daily when I think the market will implode, or more specifically if I think that we are in a stock market bubble. If, in fact, we are in a bubble, it is one of the most unusual ones of all time. The market has gone practically straight up since 2009, yet stocks continue to be fairly reasonably priced. I find no extraordinary divergence between fair value and the current trading on the stock market.

One of the reasons why the market continues to be fairly priced is because interest rates are extraordinarily low. Every time I hear someone compare the current stock market to a period from a prior year, I always ask them to compare valuations with current interest rates. We receive a call almost daily from a prospective investor, trying to beat the yields on a money market account CD. If you have not figured it out by now, the reason there are such meager interest rates is because the Federal Reserve wants them to be that way.

It is fairly clear that the actions of the Federal Reserve are designed to inflate asset values. When you inflate asset values, you create a wealth effect wherein people feel comfortable spending their money on items such as new cars, homes, and other capital assets. One way to accomplish this is to make interest rates so unappealing that people begin to seek other ways to earn higher rates of return. For the last 18 months the Federal Reserve has consciously moved to keep interest rates low. They have succeeded in forcing cash out of people’s savings accounts and into other assets. This has also accomplished their goal of moving real estate to firmer ground while appreciating the real estate and equity markets, which is the exact end result that the Federal Reserve desires.

The perception by some that the stock market is too risky at the current time continues to baffle me. If you look over the last 20 years, there certainly have been periods of time when the market suffered losses, both big and small. In 1994, the market was marginally lower, losing less than 2%. And of course, we all remember the 2000-2002 losses that occurred after the NASDAQ Composite run-up in the rally. The stock market lost money in 2000, 2001, and 2002, and made a very dramatic move to the downside. Not long after that, in 2008, the market suffered one of its worst losses of all time, losing 37% in one year. Consequently over the past 20 years, the market lost money in five of those years, or 25% of the time. While that 37% loss in 2008 seems to be etched in everyone’s mind, they seem to forget that since then, the market, beginning with 2009, has increased yearly by the following percentages - 26, 15, 2, 16 and now 29%. Despite five years of losses in the past 20 years, the market still has an annualized return of 8.2%. If you consider that your money market account is currently earning zero and the market is returning 8.2%, it makes you question why anyone would keep money in cash these days.

Although virtually everyone reading this blog has cash available in money market accounts, they tend to only invest money annually or even less often and usually in large blocks. This limited investment strategy has proven to be unsuccessful. A significant amount of money could be made by investing monthly, which is referred to as Dollar-Cost Averaging. Made easy by electronic transfers from your individual checking account or money market account, your money could easily be put to work in a market that is earning handsome returns as opposed to earning virtually zero while sitting in cash.

While certainly nobody knows what the month of December holds from an investment standpoint, historically it has been a very good month. We have not had a negative December since 2007 and it is highly unlikely that we will see one in 2013. As previously mentioned, the period of time from November through April has historically been the most profitable time for investing in stocks because a lot of the money invested in pensions, IRAs, and other type of retirement accounts are invested during this period. If you have money that is not invested, now would be the time to take advantage of this excellent market. Additionally, we are quickly approaching January which would be a great time to make your IRA contributions for 2014.

Please feel free to give us a call to set up an appointment to discuss new ways that you can begin to save more and invest in enterprise by participating in the stock market.

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

Best regards,
Joe Rollins