Wednesday, September 2nd, 2009
As we head into the fall and we look forward toward next year, it is important to take a look at the general econimc landscape, assess the data that we have access to, and develop our views on the performance of our investments going forward.
The following are three high-level economic data points that we can use, along with our other tools, to further assist us determining our views on equity market investments.
1.) U.S. Housing
As the root of the credit crisis, healing in the U.S. housing market is a precondition for sustainable recovery. Recent data has confirmed that the worst is behind us and the residential real estate market is stabilizing.
The inventory of unsold houses while still high is heading in the right direction towards clearing and sales of existing homes have recently turned positive on a year-over-year basis. And an index which measures year-over-year price changes of houses in 20 major U.S. cities (the S&P/Case-Shiller Home Price Index) plunged 33.6% from its June 2006 peak to the April 2009 trough, but has now climbed 1.9% over the past two months.
2.) The U.S. Consumer
The resurgence of the U.S. consumer will be key to watch as recovery unfolds since consumption is 70% of the American economy. Despite the ‘hit’ that the housing crisis has exacted on their net worth, American household balance sheets are still in relatively better shape than they’ve been in the past due to the tremendous growth net worth over the last decade.
However, the process of deleveraging (winding down debt) has begun and this will impact spending patterns in the near-term.
3.) The U.S. Manufacturing
The level of manufacturing has historically followed an inverse path to the Fed funds rate but on a 6-month lagged basis – as the fed funds rate drops, six months later, manufacturing activity picks up.
However, in fall 2008, although rates declined to historically low rates, the credit crunch intensified and that typical relationship between low interest rates and increased manufacturing activity did not materialize. More recently, credit channels have opened up and the ISM (gauge of manufacturing activity) has improved, indicating the economy is finally responding to massive stimulus after a long lag.
And further improvement just yesterday with the latest ISM level better than expected at 52.9 – the first reading above 50 since January 2008 and hit the highest level since June 2007. This is further indication that while not yet normal, the economic environment is normalizing.
These are three key areas of the market to watch when assessing the high-level economic situation and it’s relationship to the stock market trends and valuations.
Of course this isn’t the be all and end all of data you should include in your due diligence, but it certainly plays a role as you calculate your risk tolerance moving forward.
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Wednesday, August 5th, 2009
Just a few days into August and markets seem to have picked up where they left off in July.
Here’s a summary of market action and key developments from last month, including monthly benchmarks.
- Investors saw more data indicating that healing is underway in the global economy. Increased optimism paved the way for a fifth consecutive month of gains across world markets.
- International stocks advanced. The MSCI World Index returned 8.4% (in $US terms). Since March 9th, the MSCI Asia Index has risen about 58% in local currency terms.
- Commodity prices rose. Copper is up more than 80% year-to-date supported by increased demand from China. The S&P/TSX Composite Index benefited, adding 4%. The S&P/TSX has climbed 45% since hitting a five-year low on March 9th.
- In the U.S., stocks made up more ground. The Dow Jones Industrial Average (DJIA) had its best month since 2002, up 8.6% . The S&P 500 Index advanced for the fifth consecutive month (the longest streak since 2007) gaining 7.6% . The S&P 500 is now up more than 40% since March 9th and Monday, it closed above the 1,000 level for the first time since November 2008.
- Volatility continued to be a key theme in currency markets. After falling more than 6% against the U.S. dollar in June, the Canadian dollar appreciated by 7.4% versus its U.S. counterpart in July. This cut into returns on investments denominated in $US. Case in point, the 7.4% gain on the S&P 500 was essentially wiped out when converted back to C$.
With much of the latest economic news continuing to look less bad (over 70% of companies beat expectations last quarter and it appears US housing may have found a bottom), the economy looks to be on the mend.
However, we must realize that the rate of recovery that we are seeing is not normal and likely cannot be maintained long-term. That said, as an investor looking out 5+ years I belive valuations in the equity market are still low and the potential remains for double-digit returns heading forward over a 5+ year horizon.
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Thursday, July 16th, 2009
If you’re still standing on the sidelines in cash at the moment, here are three good reasons that you should be invested in stocks right now.
- An investor’s choice of asset allocation is the single largest factor that will influence the probability of long-term success. Historical evidence suggests that cash investments return the least amount over the long run.
- There is significant upside potential in equities for long-term investors right now. Stock valuations are, despite Q2’s rebound, well below their highs and have a long way to go to be back in line with what we consider to be fair value.
- Sustained low interest rates and dramatic increases in money supply combined with increased deficits have many fearful of the inflationary impact once economic recovery takes hold. Money market investments, non-market linked CD’s and high interest savings accounts offer little protection against the wealth eroding effect of inflation.
That is not to say that there is no downside. In fact, there is an inherent risk when investing in equities. However, I beleiive the risk vs. reward payoff still favors the equity investor at this time.
Posted in Investment News | 8 Comments »
Friday, August 1st, 2008
What About Global Markets?
With markets in Europe and Japan seeing much of the same fate as the Unites States, global diversification almost seems to be a forgotten concept these days. For those investors who have been gathering cash and are now looking to enter the market again, history shows that a strategically diversified portfolio will outperform money market or bond investments over the long term.
It often helps to remind ourselves that, while some areas of the market may not be performing well in this downturn, other areas or regions may be offering decent returns. The idea behind diversification is to protect a portfolio from poor performance in one area by providing better performance in another.
Buying Undervalued Stocks
Since no one has a crystal ball to predict which regions will outperform, analyzing certain metrics, like price-to-book value, helps to uncover which stocks or sectors that are likely to perform well going forward because they are currently undervalued.
Price-to-book (P/B) is a popular ratio that indicates how much investors are willing to pay for a company’s assets. In general, the higher the ratio, the more expensive a stock is considered to be.
Where Are The Bargains?
The chart below (Courtesy RBC) captures the average P/B ratio for stocks in a number of different countries, which points to whether each market is over-priced or under-priced. The red line shows the mean, or average P/B value. Any circle above that line is considered an expensive market; anything below is considered to be attractively priced.
Stock markets in several countries, including the U.S., are now trading at below average P/B valuations. By contrast, Asia (ex Japan), China, Canada and Brazil are considered expensive relative to their historical mean valuations.
Charts such as these may help you understand why some investors are now overweight in equity exposure, many with a bias towards U.S. and global markets. It seems that the short term volatility in the markets has shifted investor focus off of valuations and into irrational fear. However, we know from historical statistics that not over-paying for investments is a key factor in achieving long-term success – which means it may be a great time to put some cash to work for the long term.
Posted in Investor Education | No Comments »
Wednesday, June 4th, 2008
We have all heard people harp on having a financial plan and investing for the future, but what does that mean? What happens when you develop your asset allocation, purchase your Dividend Growth Stocks and Dividend ETF’s and have saved for an emergency fund with a high interest online account like ING Direct?
We have also heard all of the “talking heads” on television talk about diversification. They are more than likely talking about diversifying within the stock market. Diversifying between stocks, sectors, and industries as well as between fixed income investments like bonds and equity investments like stocks. This is usually good advice, but what about other types of investments? Where do they fit in the picture and how can they help you to further grow and protect your wealth?
What Happens Next?
At Blueprint for Financial Prosperity, they ask what is next in your financial plan after you have successfully accomplished the following:
- Paid down all your debt until all you owe on is your mortgage.
- Maintain six months of expenses for your emergency fund in a high yield money market account.
- Fully fund your and/or your spouses 401k, 403b, 457, etc.
- Maximize your and/or your spouses Roth or Traditional IRA up to the allowable limit.
- Invest some money each month in a 529 plan (and possibly even a Coverdell “Education†IRA) for each of your children’s future educations.
- Set aside some additional money each month and at bonus time into a taxable brokerage account for such goals as that long-awaited trip to the Orient, the sunny vacation property on the water, or even retirement.
- All your investments are properly diversified by asset type according to your goals, time frame, and risk level.
The article goes on to mention investments in tangible assets such as gold coins or a stash of gasoline, although the latter is difficult to manage.
Diversify Away From The Stock Market!
I would suggest that diversification away from the stock market take into account a variety of tangible assets such as precious metals, raw land (vacation property is preferred), Real Estate, and valuable collectibles or antiques.
You should be aware that these tangible assets typically have narrow markets and can be very illiquid. However, they can be very valuable in times when the stock markets are out of favor and should comprise a small piece of one’s overall investment portfolio.
It is essential that you do your due diligence with every form of investment. Purchasing these tangible assets can be tricky if you are not well versed in the particular niche market. That said, thorough research could yield tremendous value so get out there and test the waters!
I have little in the way of antiques and coins, but I have had some success with Real Estate and I do own some semi-valuable sporting collectibles.
I am a strong believer in diversifying away from the stock market and I prefer rental Real Estate because I am adamant that cash flow is the engine that drives wealth. Real Estate is the only avenue where the average person can utilize the power of a mortgage as financial leverage to compound their wealth.
Posted in Investment News | 6 Comments »
