Letter to Clients – 3rd Quarter 2010
Dear Clients and Friends,
First for some quick housekeeping. I am pleased to announce that I have changed my broker-dealer affiliation from Ameritas Investment Corp. of Lincoln, NE to Broker Dealer Financial Corp. (BDFS) of Johnston, Iowa. My association with Ameritas was pleasant and rewarding. My decision to make a change was based on several factors:
- BDFS and I share the same core philosophy, the clients' interest always come first.
- My new affiliation will increase the quality and variety of financial services, products, and solutions available; often at a lower cost.
- BDFS is local and accessible.
My move to BDFS will have no impact on your investments, or our relationships with any of the companies we are already doing business with. It is simply a change in the intermediary.
In the financial world, it has taken me nearly two weeks into this quarter to commit my opinion to writing. I feel as if I am walking a tightrope and I cannot, with certainty, predict which way to lean. There are two opposing schools of thought; some analysts see the threat of a double-dip recession and another cyclical bear market for equities, while others see the economy remaining strong and corporate earnings improving in coming months. The available data can be used to bolster both the pessimists and optimists. Before we come to any conclusions, let's examine what has happened so far this year.
At the mid-point, the broader equities markets were down for the year with the S&P 500 lower by 6.7% and the Dow lower by 6.8%. The global markets saw similar performance, with the MSCI EAFE international index returning –12.9% year to date. Despite these declines, the equity markets continued to hold general levels achieved during the sharp run-up in equity prices that followed the extreme lows of March 9, 2009. But all of this happened with increased volatility. The CBOE's Volatility Index (the VIX) reached very high levels several days during the quarter.
Markets rallied in the early weeks of April, with the S&P 500 reaching a new year-to-date high on April 23, but as concerns about the strength of the nascent global economic recovery came to the fore, equities sold off through much of May. Despite a rally in the early part of the month, in late June the S&P 500 reached a new year-to-date low. For the quarter, the S&P 500 was down 11.4%.
Regardless of outlook, the market seems focused on three main concerns: the European debt crisis, unemployment and housing.
- European debt crisis: The European debt crisis was clearly the big financial story of the quarter, as investors weighed the threat of default in countries such as Greece, Spain, Italy and Ireland against the overall strength of the European economy and the ability of European nations to tighten government spending. In May, the European Union, along with individual European nations and the International Monetary Fund, created a loan package of over a trillion dollars in an effort to forestall the crisis. While the loan package was generally welcomed by investors, individual countries in Europe may still face major difficulties in working through their debt issues. Greece, in particular, has the least competitive economy in the EU and appears to have more deeply rooted financial difficulties than most European nations.
- Unemployment: Though many sectors of the economy have shown signs of growth, unemployment remains stubbornly high. Recent months have seen modest jobs growth, however the number of jobs added has had only minimal impact on the larger employment outlook. Ned Davis Research believes the job market will likely remain difficult: "We worry that the pace of job creation may not be rapid enough to quickly bring down the unemployment rate. We believe it could take several years for the labor market to get back to full employment." Supporting their view, Ned Davis cites concerns among employers about the long-term strength of the economy, limited job creation among small and new business owners, and the fact that employers now have more alternatives to hiring permanent employees, among other factors.
- Housing: For those cheering on the economic recovery, the housing market has been both friend and foe. Earlier this year, prices seemed to have found a bottom and some regional markets actually showed signs of improvement but more recent news has not been as good. Though a pullback in the number of new single-family home sales was expected following the rush to sign contracts before the April 30th tax credit deadline, the housing numbers for May were worse than many expected, down 32.7% to the lowest annualized rate ever. Sales in the West were even worse, down 53.2%.Meanwhile, according to the Case-Schiller home-price index, home prices have fallen for six straight months. Going forward, it appears the housing market will be highly dependent upon the jobs market, which in turn is likely to be most dependent on the strength and pace of the economic recovery.
Yet despite the discouraging news about unemployment and housing, there are many indications the economic recovery continues. Though recently revised downward, U.S. Gross Domestic Product is still expected to be 3% in 2010, with many analysts predicting more robust growth. Corporate profits have been strong, along with business productivity and exports. And the Federal Reserve continues to signal that interest rates, which are currently near record lows, will remain unchanged for an extended period.
The equities markets are always sensitive to new data regarding key sectors of the economy, and this is likely to be especially true in the coming months. Short term movements in the market are extremely irrational. We have experienced rapid drops in the markets when good news is announced, if the good news did not quite reach the consensus expectations. We have also seen the opposite occur.
Given the push and pull between the bad news about housing and unemployment and the generally good news about economic growth, I am cautiously optimistic. I believe we will see growth for the remaining months of 2010 but it will neither be rapid nor smooth. Instead of looking at the day to day (and, as the May 6th "flash crash" taught us, sometimes minute to minute) investors need to focus more on the horizon and ignore the gyrations along the way.
Even though I am optimistic, there are many defensive techniques we can employ to offset the volatility we expect in the months and years to come.
The change from Ameritas to BDFS does require that we transfer each account one by one. We can usually complete the paperwork through email, fax, or US mail but I am also available should you want meet personally. We are in the process of reaching out to every client, but if you would like to transfer your accounts sooner, please get in touch with me or my assistant, MacKenzie, so we can accomplish the transfer in the method most convenient to you.
Be sure to let me know if you have any questions or concerns about the transfer or your financial well being in general. Thank you for the opportunity to continue serving your needs as well as your continued trust. I remain confident in my ability to serve you well in the future.