Last week was rough for global financial markets. Stocks had their worst week since 2008. In addition, gold was down 10 percent and silver 25 percent for the week. It is times like these when retail investors ignore valuations and start making decisions based on fear.
Retail investor behavior can best be demonstrated by a study by Dalbar Inc., which found that although the U.S. stock market (as measured by the S&P 500 index) grew at 9.14 percent per year between 1990 and 2010, the average investor in the stock market during that time only earned 3.83 percent. That is stunning! Retail investors are earning less than half the market’s return. Why is that? The investments work. The problem is investor behavior. Normal human emotion leads investors to buy high and sell low. Now is the time that we see investors selling low. Markets could still go lower but we are already 16 – 25 percent below the recent market highs.
There are always legitimate concerns which lead to this type of market decline, but eventually the clouds lift and markets rally quickly and when you least expect it. Investors always convince themselves that “it is different this time”, but it is not. Market timing has never been a reliable strategy. Investing based on valuations is the only thing that has worked over the long term.
Posted in Weekly Insight | Posted on 26-09-2011
Last week, was a very good week for stocks due to glimmers of hope that Greece will avoid default. When stocks are this cheap, any good news will have an impact. Greece is trying very hard to get their deficit under control so that the European Central Bank will give them the next $8 billion (Euro) installment of bailout money. Without the money, Greece will not be able to pay their government workers or pensions next month. Even if they get the money, there is a long way to go before this crisis is over. Keep in mind that Greece’s economy is tiny (Approx $343 billion GDP). However, the real risk is that the crisis spills over to larger European economies that also have serious budget problems.
The contagion risk is not only real, but was highlighted today when S&P downgraded Italy’s credit rating to A and kept its outlook at negative. The other major rating agency, Moody’s, will likely follow suit next month. This raises the cost of borrowing for Italy. Italy’s economy is 8th largest in the world. If they need a bailout, all bets are off. The silver lining here is that all this uncertainty has kept the demand for U.S. bonds very strong which lowers the cost of borrowing for the U.S. In the last 50 years the 10 year U.S. Treasury bond has ended the year yielding less than 3 percent only once. It is currently yielding 2.04. Have a great week.
Posted in Weekly Insight | Posted on 20-09-2011
The European financial crisis took a turn for the worst last week. The lead representative from Germany to the European Central Bank resigned to protest the measures being used to prop up the most indebted EU countries. This put markets in a tail spin. Bond markets are now pricing in a 91 percent chance of Greece defaulting on their debt. Greece is frantically trying to do anything to get the next installment of bailout funds since they will be out of money in matter of weeks and no one in the private markets will lend them more. They cannot print money (like we can in the U.S.) since they are part of the Euro and therefore printing money would devalue the currency for all other member countries. Greece’s spending cuts and tax increases have pushed their economy into a deep recession making their deficit even worse. Their economy is expected to contract by 5 percent this year.
No one really knows what will happen if Greece defaults. The concern is that the largest banks in Europe (who all hold Greek bonds) will take big losses. The index of European bank stocks is down 25 percent since August 1st. Many of the largest banks in Europe will likely be nationalized, thereby wiping out shareholders. All of this is driving the price of European stocks down to valuations not seen in decades. Buying opportunity? Not yet, but stay tuned.
Posted in Weekly Insight | Posted on 12-09-2011
Global stock markets have been in decline for the past few days and there are plenty of reasons. However, the biggest problem on the world economic stage is Europe.
If you combined all 17 economies in the Euro zone, the result would be a single economy that is doing OK. However, on an individual basis there are definite bright spots (Germany) and potential disasters (Greece, Italy, Spain, Portugal, Ireland). The charter of the European Union requires member nations to keep their annual deficits below 3 percent of Gross Domestic Product (GDP) and cummulative debt is not to exceed 60 percent of GDP. 10 of the 17 countries are currently violating the annual debt limit and 9 of 17 are in violation of the cumulative debt limit. The problem is that there is no good way to enforce these rules.
Posted in Weekly Insight | Posted on 06-09-2011