Groundhog Day: Will September’s Sell-off Repeat?

Tuesday, August 21st, 2012

by Russ Koesterich, Chief Investment Strategist, iShares

Come September investors might feel as if they are trapped in their own version of Groundhog Day. Last year, the Dow dropped 6% in September. Given the month’s consistently negative bias and lingering headline risks, there is a reasonable chance markets will come under pressure again this year.

While investors often pay too much attention to the calendar, September is the notable exception. Looking at data on the Dow Jones Industrial Average, which stretches back to 1896, September has historically been the worst month of the year, with an average return of slightly worse than negative 1%. This is the only month of the year for which the seasonal bias is so great as to be considered statistically significant.

The tendency for markets to fall in September is also evident when you look at the win rate – how often equities move higher. The win rate in September is barely 40%, versus nearly 60% for the other 11-months. Finally, this phenomenon is not limited to the United States. September has historically been the worst month of the year in a number of European markets – including Germany and the United Kingdom, as well as in Japan.

In addition to a negative seasonal bias, there are three other reasons to be concerned about the headline risk to the markets in the coming weeks:

• On September 12, the German Constitutional Court will rule on the constitutionality of the European Stability Mechanism (ESM). Investors currently expect a favorable ruling, so any other outcome is likely to be disruptive.
• The Netherlands holds an election, also on September 12. This is risky for markets as the outcome may very well be a fragmented government, which will call into question the commitment of the Dutch to further fiscal integration and their support for the southern European countries.
• Closer to home, the US Federal Reserve will begin two days of deliberation on September 12 about the economy and monetary policy. Many investors are still expecting, or at least hoping for, an extension of the Fed’s quantitative easing program, but there is considerable scope for disappointment should the central bank stand pat.

In addition to headline risk, there has been a growing complacency in global equity markets. This trend is particularly evident when looking at implied volatility, or the VIX Index. In mid-August the VIX went below 15, well below its long-term average. While there are several technical reasons that the VIX is this low, it should still concern investors. A low VIX reading indicates weak demand for put protection, suggesting that investors are not particularly concerned with downside protection. Previous readings in this vicinity – in March of 2012 and the spring of 2011 – coincided with short-term tops.

How should investors position their portfolios? While I still prefer equities over the long-term, this is probably a reasonable time to consider trimming back on positions and looking for instruments that offer the potential for downside protection. One way to achieve this is to re-allocate from a cap-weighted exposure into a minimum volatility fund, or other instruments which tend to have a lower market beta.

For investors looking for global exposure, I like the iShares MSCI ACWI Index Fund (NYSEARCA:ACWI), the iShares MSCI All Country World Minimum Volatility Index Fund (NYSEARCA:ACWV), or the iShares S&P Global 100 Index Fund (NYSEARCA:IOO).

Source: Bloomberg

Russ Koesterich, CFA is the iShares Global Chief Investment Strategist and a regular contributor to the iShares Blog. You can find more of his posts here.

The author is long IOO.

In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Minimum volatility funds may experience more than minimum volatility as there is no guarantee that the underlying index’s strategy of seeking to lower volatility will be successful.
Index returns are for illustrative purposes only. Indexes are unmanaged and one cannot invest directly in an index.

Tags: Chief Investment Strategist, Constitutionality, Deliberation, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, European Markets, European Stability, Federal Reserve, German Constitutional Court, Groundhog Day, Investors, Koesterich, Month Of The Year, Negative Bias, Netherlands, Phenomenon, Russ, Southern European Countries, Tendency, Us Federal Reserve
Posted in Markets | Comments Off

Keep an Eye on May Stock Market Peaks, says Richard Russell

Thursday, August 9th, 2012

Richard Russell, 88-year-old writer of the Dow Theory Letters, called a bear market for U.S. stocks a few months ago. An update on his latest thinking is reported below.

Question: Richard, everybody has emotions. So where are your emotions regarding this market? From an emotional standpoint, be honest, are you really bullish or bearish?

Answer: If the Averages confirm that this is truly a bear market, I’ll have mixed emotions. On the one hand I will have been proven right on my bear market call, and that will be a boost to my ego. But I can’t say I’d be happy we’re in a primary bear market.

But if the Averages close above their May peaks, and all my charts point to a bull market, I’ll have been proven wrong on my bear market call, and that will be a bruise to my ego.

Source: StockCharts.com

Nevertheless, I’d much rather be living through a bull market than a bear market – a bull market would be far better for me and my kids and for my business. So call it strange, but from an emotional standpoint I’d prefer to have been wrong on my bear market call, and I’d prefer that we’re in a re-confirmed bull market.

Therefore, instead of confusing my subscribers with a lot of ego-boosting baloney, I’m just going to call this market the way I see it, being as honest and unemotional as I can possibly be.

If we are truly in a primary bear market, I have an intuition that it could turn out to be the worst bear market in history – and that’s another reason why I secretly hope I have been wrong on my bear market call.

Another intuition – we will know the final answer as to whether we’re in a bull or bear market by October.

[PduP: Yesterday's closing levels of the benchmark U.S. indices were within reach of the May peaks: Dow Jones Industrial Average – 13,176 vs 13,279 and S&P 500 Index – 1,402 vs 1,419.]

Source: Dow Theory Letters, August 7, 2012.

Tags: Amp, August 7, Baloney, Bear Market, Bruise, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Dow Theory Letters, Ego, Final Answer, Intuition, Mixed Emotions, Richard Russell, Standpoint, Stock Market, Stocks, Strange, Subscribers
Posted in Markets | Comments Off

Mythbusting: How Elections Affect Markets

Friday, August 3rd, 2012

by Russ Koesterich, Chief Investment Strategist, iShares

Elections do matter for the markets, but not necessarily for the reasons that investors tend to believe. Ahead of the US presidential election in November, I’m going to attempt to debunk some of the common myths surrounding markets and elections:

Myth #1: Party affiliation matters when it comes to market returns.

There is little to no evidence to support the fact that the winning candidate’s party makes a difference to markets. Over the past century, which party occupies the White House has had no discernible or consistent impact on US equity markets. Since 1900, when a Democrat has been in the White House, the average return for the Dow Jones Industrial Average has been around 8.5%; for Republicans the average is around 6% (neither average includes dividends). When you adjust those averages for the market’s volatility, the numbers are statistically the same. In other words, the party affiliation of the president has had no consistent influence on stock market performance, though many investors still believe this.

Myth #2: Divided government is good for the financial markets.

Following the halcyon days of the 1990s, many investors have come to believe this myth. While divided government was certainly good for markets in the 1990s, that seems to have been an anomaly. The 1990s were unusual and were a function of many factors, including a secular drop in interest rates, a productivity surge, and the taming of inflation. Unfortunately, conditions are very different today.

Looking at the last century of data, there is no evidence that divided government produces better returns. In fact, in the past equities appear to have actually done better when one party has controlled both Congress and the White House, though the numbers backing this better performance aren’t statistically significant and should be taken with more than a grain of salt.

What Does Matter: Policy

None of the above implies that the outcome of this election is irrelevant for financial markets. While politicians cannot fix much of what ails the global economy, sensible economic policy would help mitigate the damage. There is also quite a bit that politicians can do to make matters worse. In short, as I write in my new Market Perspectives piece, the election will matter a great deal.

There are a number of issues, both long and short-term, which can only be solved in Washington. The absence of progress will likely worsen the economic malaise and in the case of the fiscal cliff push, the United States back into recession. On the other hand, real progress on taxes and entitlements could remove at least some of the headwinds holding back growth.

Both the fiscal cliff and the entitlements issue are extremely important to the capital markets. Evidence that we’re not doing everything we can to resolve them is likely to push stocks lower and volatility higher. To state the obvious, should we allow this to occur it would be a game changer for US financial markets.

If we wake up on the morning of November 7 with continued divided government and no consensus on reform and then no consensus is reached before the fiscal cliff hits in January, investors may want to consider opting for these five portfolio moves:

1.) Less equity exposure

2.) A higher allocation to defensive sectors like consumer staples and healthcare, accessible through the iShares S&P Global Consumer Staples Sector Index Fund (NYSEARCA: KXI) and the iShares S&P Global Healthcare Sector Index Fund (NYSEARCA: IXJ).

3.) Less credit exposure in the fixed income section of their portfolios

4.) A smaller allocation to commodities

5.) A higher weight to dollar-denominated assets

Source: Bloomberg

Russ Koesterich, CFA is the iShares Global Chief Investment Strategist and a regular contributor to the iShares Blog. You can find more of his posts here.

In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Narrowly focused investments typically exhibit higher volatility.

Copyright © iShares

Tags: 1990s, Anomaly, Chief Investment Strategist, Common Myths, Democrat, Dividends, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Financial Markets, Grain Of Salt, Halcyon Days, inflation, Ishares, Koesterich, Myth 2, Party Affiliation, Russ, Stock Market Performance, Us Presidential Election, Volatility
Posted in Markets | Comments Off

What History Suggests About the Future of Stocks

Thursday, August 2nd, 2012

by Seth Masters, Chief Investment Officer, AllianceBernstein

Some experts today argue that the world has entered a “New Normal” condition in which stocks have permanently lost their return edge. We’ve heard this before. It was wrong then, and we think it’s wrong now, too.

In 1979, BusinessWeek published a cover story famously called “The Death of Equities.” Then, like now, stock market returns had lagged 10-year Treasury returns for a decade, although for somewhat different reasons.

Stock returns had been dragged down by the bursting of a bubble (the Nifty Fifty) and bleak economic conditions. OPEC had unleashed its second oil-price shock in five years. The so-called misery index—the sum of the unemployment and inflation rates—was 20% in the US, double its level today (because inflation is now very low). And corporate profits were very weak (today, they are very strong).

BusinessWeek was capturing widespread sentiment about the economic and market outlook. Nonetheless, stocks handily beat bonds over the 10 years starting in 1979.

As the ubiquitous legal disclosure says, past performance does not guarantee future returns. Indeed, performance often reverses sharply.

Between 1901 and the onset of the recent credit crisis, there have been 11 10-year rolling periods in which bonds beat stocks, all of them coinciding with the Great Depression or the stagflation of the 1970s. And after each and every one of them, stocks beat bonds for 10 years—on average, by 5.8%, as the Display below shows.

Because we are human, we all tend to expect the future to resemble the recent past—to become “anchored” in our recent experience. It takes guts to buck the trend. But at a September 1983 client conference, we cited good fundamental reasons in making “The Case for the 2,000 Dow.” The Dow Jones Industrial Average was then slightly below 1,300. It reached 2,000 in January 1987, about three-and-a-half years later.

Today, our median annual return projections for global and US stocks are about 8% over the next 10 years, far ahead of our projected 2% median return for 10-year Treasuries. At that rate, the Dow could hit 20,000 in five to 10 years. In the same time frame, the S&P 500, a more representative index, could hit 2,000. (It’s now around 1,300.)

Our projected stock returns may sound optimistic. They’re not. They are well below the long-term average for US and global equities, and are based on conservative assumptions about economic and market conditions.

Still, many pundits argue that stocks today are overpriced. My next blog post will assess stock valuations.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.

Seth J. Masters is Chief Investment Officer for Asset Allocation at AllianceBernstein and Chief Investment Officer of Bernstein Global Wealth Management, a unit of AllianceBernstein.

Tags: Businessweek, Chief Investment Officer, Corporate Profits, Credit Crisis, Different Reasons, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Fundamental Reasons, Future Returns, Great Depression, Inflation Rates, Legal Disclosure, Market Outlook, Misery Index, Oil Price Shock, stagflation, Stock Market Returns, Stock Returns, Stocks Bonds
Posted in Markets | Comments Off

Are We Near the End of the Correction? (Doll)

Monday, May 21st, 2012

May 21, 2012

Stocks Drop as Europe Takes Center Stage

by Bob Doll, BlackRock

Although US economic data was generally good last week, stocks sank sharply as investor fears over Europe’s debt problems intensified. For the week, the Dow Jones Industrial Average fell 3.5% to 12,369, the S&P 500 Index dropped 4.3% to 1,295 and the Nasdaq Composite declined 5.3% to 2,778.

At present, the focus of the European debt crisis is on Greece, particularly on next month’s elections. The upcoming elections look to be turning into a referendum on whether or not Greece will remain part of the eurozone. Should the more extreme parties in Greece gain popularity, the greater the likelihood that the country exits the eurozone. The more traditional Greek political parties, as well as the powers that be in Europe as a whole, are pushing for Greece to remain part of the euro, but the outcome is far from clear and the uncertainty has rattled global financial markets.

Of course, Greece is capturing most of the headlines, but perhaps more worrisome is the debt contagion that appears to be spreading to other countries such as Spain and Italy. It is important to note, however, that contagion is not spreading as widely or as deeply as it did last year. This resilience reflects the sounder position of both the global financial system and global economic indicators, although it is difficult to take too much comfort in this fact since a broader resolution of the eurozone crisis is not yet in sight.

In some sense, the only hope for the eurozone is to lower monetary policy further, which would also push the value of the euro lower. Additionally, we believe the European Central Bank would have to engage in larger-scale bond purchases to improve financial market liquidity. The alternative could be the disintegration of the euro over time.

US Recovery Remains on Firm Ground

Despite the mounting crisis in the eurozone, the US economic recovery continues to look stable. Retail sales growth has slowed recently, but we expect the decline in oil prices could help reverse that trend and provide a boost to consumption. Additionally, business spending remains solid and we are seeing a pickup in residential construction. The labor market strength that was evident earlier in the year appears to have ebbed somewhat, but we are calling for improved employment growth in the second half of the year. Our overall economic growth forecast has not changed since the beginning of the year. In January, we were forecasting that the United States would experience growth of between 2% and 2.5% in 2012, and we are sticking to that forecast.

Given the recent increase in global financial stress and the stumble experienced by stocks, there has been some renewed discussion as to whether the Federal Reserve might engage in additional easing measures. At this point, we do not believe that is likely. In our view, the Fed would need to see some deterioration in the pace of economic growth before it would decide to take action.

Market Positives Should Win Out

While it is true that US stocks have taken a turn for the worse over the last month, other markets (particularly European stocks) have been hurt even more. On a year-to-date basis, European stocks are down roughly 3%, while US stocks are still up close to 6%. This divergence represents a continuation of the pattern that has been in place since the current bull market started in March 2009. Since that time, US stocks have appreciated by nearly 70%, while European equities have climbed by just a little more than 10%.

So what is the likely outcome for US stocks given the prevailing backdrop? In the near term, it appears stocks will continue to face crosscurrents that have solid corporate earnings and economic growth pushing prices higher and uncertainty and fear over macro risks pushing them lower. Until these crosscurrents diminish, we expect the volatile trading pattern we have seen over the last several weeks could continue.

Several weeks ago, we suggested the current market correction could push the S&P 500 down to somewhere between the 1,300 and 1,350 level. We are just below the low end of that zone right now, which begs the question of whether the correction is near an end. Forecasting near-term market swings is, of course, an impossibility, but we would point out that with sentiment low, investor cash levels high and valuations compelling, stocks do appear attractive. In our view, markets are awaiting some sort of positive jolt (perhaps in the form of a policy response in Europe or some stronger US economic data) to break out toward the upside.

About Bob Doll

Bob Doll is Chief Equity Strategist for Fundamental Equities at BlackRock®, a premier provider of global investment management, risk management and advisory services. Mr. Doll is also Lead Portfolio Manager of BlackRock’s Large Cap Series Funds. Prior to joining the firm, Mr. Doll was President and Chief Investment Officer at Merrill Lynch Investment Managers.

You should consider the investment objectives, risks, charges and expenses of any fund carefully before investing. The funds’ prospectuses and, if available, the summary prospectuses contain this and other information about the funds, and are available, along with information on other BlackRock funds by calling 800-882-0052. The prospectus and, if available, the summary prospectuses should be read carefully before investing.

The information on this web site is intended for U.S. residents only. The information provided does not constitute a solicitation of an offer to buy, or an offer to sell securities in any jurisdiction to any person to whom it is not lawful to make such an offer.

Sources: BlackRock, Bank Credit Analyst. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of May 21, 2012, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.

BlackRock is a registered trademark of BlackRock, Inc. All other trademarks are the property of their respective owners.

Prepared by BlackRock Investments, LLC, member FINRA.
NOT FDIC INSURED / MAY LOSE VALUE / NO BANK GUARANTEE

Tags: Blackrock, Bob Doll, Contagion, Debt Crisis, Debt Problems, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Economic Data, Eurozone, Gain Popularity, Global Economic Indicators, Global Financial Markets, Global Financial System, Investor Fears, Market Liquidity, Nasdaq Composite, Reta, Upcoming Elections, Value Of The Euro
Posted in Markets | Comments Off

Market Drawdown Presents Buying Opportunities

Tuesday, April 17th, 2012

Market Drawdown Presents Buying Opportunities

by Bob Doll, Chief Equity Strategist, Fundamental Equities, BlackRock

April 16, 2012

Another Downturn for Stocks

Once again, risk assets struggled last week with most investors blaming the downturn on re-ignition of concerns over the European debt crisis brought about by a disappointing debt auction in Spain. For the week, the Dow Jones Industrial Average fell 1.6% to 12,849, the S&P 500 Index declined 2.0% to 1,370 and the Nasdaq Composite dropped 2.3% to 3,011.

Does History Repeat? Or Just Rhyme?

Last year around this time, stocks were coming off an impressive first quarter, but were headed for trouble. Higher oil prices, the earthquake in Japan and the brouhaha over the US debt ceiling all conspired to cause a sharp turnaround in risk assets. So far this year, stocks have been following a somewhat similar pattern as early strength for equities appears to be fading somewhat. So, it is worth asking the question: Will 2012 look like 2011?

There are some aspects of the financial and economic backdrop that do look similar between the two years. In addition to the flare ups in Europe regarding debt problems, we are currently in the midst of a period of rising energy prices. Gasoline prices in particular are getting close to last year’s peaks. We are also seeing some renewed weakness in the economic data—the pace of jobs growth slowed in March and consumer confidence levels have been looking softer. Should gasoline prices continue to rise, it would be reasonable to fear that the spillover effect onto the rest of the economy would worsen.

We believe it would be a mistake, however, to look too closely to 2011 as a model for what might happen this year. For starters, current expectations for both the economy and the markets are worse than they were at this point last year. In early 2011, investors were pricing in a better economic environment than what would ultimately come to pass. In contrast, at this point we believe that markets are already priced for relatively modest levels of growth, suggesting that there is less room for downside disappointments. Additionally, the fundamental strength of the economy is better now than it was one year ago. Notwithstanding last month’s data, the labor market is stronger than it was, housing appears to be bottoming and US credit conditions have been improving. Finally, it is important to remember that the recovery and market strength last year were, to some extent, derailed by the natural disasters in Japan and by S&P’s credit downgrade of the United States. While external shocks are always a risk, we can hope that these sorts of factors will not be repeated.

Reasons for Optimism

Given the relative differences between the economy in 2011 and what it looks like today, we believe the US economy will be more resilient than it was last year, providing some support for US equities.

In addition to the economic backdrop, we would also look to corporate earnings as a source of strength. Although we are forecasting that the pace of earnings growth will be slower this year than it has been in the recent past, so far the data has shown that corporate earnings have been doing just fine. Expectations for the first quarter have been set relatively low, but so far over 80% of the companies that have reported have surpassed expectations, which is a good sign. (In comparison, in the previous several quarters around 60% to 70% of companies beat expectations.)

Putting all of this together, we would argue that we are unlikely to see the sort of sharp and severe pullback in stock prices that we witnessed in 2011. We do, however, expect to see higher levels of volatility in the months ahead compared to what we experienced in the first quarter and we would not be surprised to see the current pullback take the markets down to around the 1,350 or 1,300 level for the S&P 500. Such a pullback would represent a normal correction occurring in the midst of a bull market. Furthermore, we also believe that stocks should see a resumption of gains after the current period of weakness, which could create buying opportunities for investors.

Tags: Bob Doll, Brouhaha, Confidence Levels, Consumer Confidence, Debt Ceiling, Debt Crisis, Debt Problems, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Drawdown, Earthquake In Japan, Economic Backdrop, Economic Data, Energy Prices, Flare Ups, Gasoline Prices, Nasdaq Composite, Rising Energy, Spillover Effect
Posted in Markets | Comments Off

Does the Rally Still Have Legs? (Lee)

Thursday, April 12th, 2012

Does the Rally Still Have Legs?
And Things to Keep an Eye on in the Second Quarter

by Alfred Lee, CFA, CMT, DMS
Vice President & Investment Strategist, BMO ETFs & Global Structured Investments
BMO Asset Management Inc.
alfred.lee[@]bmo.com
 
April 12, 2012

Recent Developments:

• U.S. equities registered their best first quarter in 14 years. A definite surprise given the macro-economic and geo-political concerns coming into the new-year. The S&P 500 Composite Index had a total return of 12.6% over the quarter, while the more blue-chip oriented Dow Jones Industrial Average returned 8.8% and the more tech-heavy Nasdaq-100 Index returned an impressive 21.2% over the same period (all in local currency terms). Over the last 16-months, we have recommended an overweight to U.S. equities and continue to do so.
• Much of the rally was attributed to the European sovereign debt concerns being placed on the backburner as policy measures put in place by European Central Bank (ECB), were successful in preventing a liquidity crisis over the short-term. With decreased concerns of an immediate tail-risk event1, global investors shifted their focus to U.S. economic data, which continued to gather momentum, especially on the consumer confidence front. While the first quarter rally had significant breadth, with only the telecom sector trading below its 200-day moving average, three sectors did much of the heavy lifting in driving U.S. equities higher. These sectors were financials, technology and consumer discretionary.
• On a fundamental level, most global equity markets still look attractive from our point of view, with most major equity indices trading below their 10-year averages in price-to-earnings (P/E) ratios, leaving the opportunity for further multiple-expansion if macro-economic risks remain subdued.
• We have been keeping a very close eye at the CBOE/S&P Implied Volatility Index (VIX) over the last four months, trying to find indications of when and if volatility will return. As mentioned in one of our prior reports, the VIX had hit an intraday low of 13.99 several weeks ago, which is abnormally low even in a secular bull-market. Last week, the VIX did pop from 15.83 to 16.65 on an intraday basis on the release of the U.S. Federal Reserve Board minutes. The VIX also moved even higher on news of a weak Spanish debt auction late last week and earlier this week, when the market reopened as a result of last Friday’s non-farm payroll coming in well short of expectations (Chart A). Though the VIX, which currently sits at 18.51, is still below its long-term average of 20.0, it has recently become more reactive to negative headlines, especially compared to its behaviour early in the first quarter. (Chart B). While not an immediate concern, whether equity market volatility can remain compressed is something to keep an eye on in the second quarter.
• Another key indicator to watch for is the price of insuring against a default of Spanish sovereign debt, through the price of its credit default swaps (CDS). More specifically, if the spread between 1-year and 5-year CDS prices on Spanish sovereign debt begins to contract, then the market will likely shift its focus back to the European debt crisis. (Chart C).

Investment Idea:

• If we continue to see an absence of macro-economic concerns, the upcoming U.S. earnings season will likely set the tone for the second quarter. Investors should also keep in mind that the ECB’s Long-term Refinancing Operation (LTRO) was designed to prevent an immediate liquidity crisis and not resolve long-term solvency issues. Given the strong rally in the first quarter, investors may want to consider a more defensive approach in their equity positioning as the technical underpinnings of the market suggest a near-term consolidation. Furthermore, diversification and tactical positioning will remain the key to success in 2012.
• For equity exposure, we remain bullish on the U.S. and prefer non-cyclical areas and/or dividend oriented areas in Canada. For fixed income and credit, we continue to recommend overweighting the short- and mid-part of the yield curve and prefer federal and corporate bond exposure. U.S. high yield corporate bonds and emerging market debt are also currently offering attractive yield at very reasonable volatility levels. Please refer to our most recent Monthly Strategy Report, “Silent Rivers Run Deep,” which can be found on our homepage (www.bmo.com/etfs) for our current strategic and tactical portfolio positioning using ETFs.

Chart A: Frequent Gaps in VIX Indicates Increasing Investor Nervousness

Source: Bloomberg, BMO Asset Management Inc.

Chart B: Volatility Looking Bottomed Out

Source: Stockcharts.com, BMO Asset Management Inc.

Chart C: Could Spain be the Next Problem Child in the European Debt Crisis?

Source: BMO Asset Management Inc.

*All prices as of market close April 9, 2012 unless otherwise indicated.

¹ Tail-risk event: The risk of an outlier or improbable event occurring. Statistically, the event is said to be three standard deviations or more away from the mean, under a normally distributed curve.

Disclaimer:
Information, opinions and statistical data contained in this report were obtained or derived from sources deemed to be reliable, but BMO Asset Management Inc. does not represent that any such information, opinion or statistical data is accurate or complete and they should not be relied upon as such. Particular investments and/or trading strategies should be evaluated relative to each individual’s circumstances. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment.

BMO ETFs are managed and administered by BMO Asset Management Inc, an investment fund and portfolio manager and separate legal entity from the Bank of Montreal. Commissions, management fees and expenses all may be associated with investments in exchange-traded funds. Please read the prospectus before investing. The indicated rates of return are the historical annual compound total returns including changes in prices and reinvestment of all distributions and do not take into account commission charges or income taxes payable by any unit holder that would have reduced returns. The funds are not guaranteed, their value changes frequently and past performance may not be repeated.

Tags: Alfred Lee, Asset Management Inc, Cboe, Cmt, Consumer Confidence, Currency Terms, Dow Jones Industrial, Dow Jones Industrial Average, Economic Risks, Global Equity Markets, Global Investors, Indices Trading, Investment Strategist, Liquidity Crisis, Nasdaq 100 Index, Policy Measures, Quarter Rally, Structured Investments, Telecom Sector, Volatility Index Vix
Posted in Markets | Comments Off

Presidential Election Year: Good for Stocks?

Wednesday, April 11th, 2012

by Columbia Management

With the election season upon us, have you been wondering what the stock market will do in a presidential election year? To be sure, no one has the answer, but looking at stock market performance during election years can provide some helpful insight.

Election year market cycles

Historical data suggest that the stock market and presidential election years follow predictable patterns and traditionally result in better performance if the incumbent party wins. A look at the historical returns of the Dow Jones Industrial Average (DJIA), the oldest equity market index that tracks 30 significant stocks, helps illustrate this point.

Over the past 29 presidential election years since the Dow was first published in 1896, the index has delivered an average return of 7.18%, slightly off from the average of 7.35% seen in a non-election year according to Dow Jones Indexes. Keep in mind that this data represents past performance and there’s no guarantee that patterns and results will continue in the future.

The political landscape

Generally, investors haven’t suffered big losses during election years. However, the market did decline as recently as the last U.S. presidential election in 2008 during the financial crisis and subsequent bear market. While historical analysis offers an interesting snapshot, it’s important to remember that each election year brings its own unique characteristics. Currently, the economic outlook for 2012 holds a tremendous amount of uncertainty with many factors up in the air ranging from corporate earnings to unemployment. In addition, the European debt crisis continues to weigh on global markets and the effects will remain unknown while problems go unresolved. All of these factors can potentially have a bigger impact on the market and your portfolio than the presidential election itself.

Politics and your portfolio

The political environment and upcoming election can certainly influence the stock market, as ultimately, the president plays a crucial role in directing the nation’s economic policy, tax rates, budgets, etc. But making any financial decisions based on election year market cycles is not a prudent investment strategy.

Stick with your long-term asset allocation strategy. Don’t let an election year influence your financial decision-making or your investment goals.

Copyright © Columbia Management

Tags: Bear Market, Columbia Management, Corporate Earnings, Debt Crisis, Dow Jones, Dow Jones Indexes, Dow Jones Industrial, Dow Jones Industrial Average, Economic Outlook, Election Season, Election Year, Historical Returns, Incumbent Party, Market Cycles, Market Index, Political Environment, Political Landscape, Predictable Patterns, Stock Market Performance, Upcoming Election
Posted in Markets | Comments Off

Overcoming Objections to Equities (Doll)

Tuesday, March 27th, 2012

March 27, 2012

Rising Bond Yields: A Concern?

Stocks sank last week, but the focus for investors has been on developments in the bond market. Within equities, the Dow Jones Industrial Average lost 1.2% to 13,080 and the S&P 500 Index declined 0.5% to 1,397, while the Nasdaq Composite managed to post a 0.4% gain to 3,067.

The yield on the benchmark 10-year Treasury had been trading at around the 2.0% level for a period of several months before moving sharply higher in recent weeks. The yield rose to above 2.35% last week before settling at around 2.25% by the end of the week (bond prices move inversely to yields). The selloff in bonds has caused some to wonder whether we are at the forefront of a bond bear market. Additionally, it raises questions about what yield movements mean for the stock market.

First, as we indicated last week, we would not be surprised to see additional upward moves in yields, at least in the short term. Economic news has been relatively good over the past few months and as long as that trend continues, yields should retain an upward bias. This is not to say, however, that a bond bear market is upon us. Typically, bond bear markets happen during periods of interest rate policy tightening. While the Federal Reserve has indicated that economic trends have been improving, there is almost no evidence to suggest that the United States is entering into an inflationary environment, and the central bank has maintained its forward guidance that short-term interest rates are set to remain low for some time.

Additionally, we do not believe that higher bond yields by themselves will act as an impediment to the stock market. While it is true that any sharp and sudden moves in yields have the potential to unnerve investors, such effects are likely to be temporary. Over the longer term, we do not believe that modestly higher yields should be a source of concern for stocks, especially since we believe that the rise in yields is coming as a result of improved economic conditions.

Economic Trends Remain Market Friendly

So what are some of the improved economic conditions that have been pushing yields higher? We have devoted quite a bit of space in recent weeks to discussing the improvements in the labor market, and while jobs growth is certainly among the most important economic indicators, there are other factors that have been showing signs of improvement as well.

Debt deleveraging remains a source of concern, but we have been seeing progress on that front. Individuals have been paying down their debt over the past few years and household debt levels have been falling noticeably. Similarly, the housing market has long been a significant source of weakness, but that sector of the economy does appear to be in the midst of a long-term bottoming process and may be entering into some sort of recovery.

An additional issue on the minds of many investors is the US fiscal situation. The end of this year marks several important deadlines, including the scheduled expiration of the Bush-era tax cuts and temporary incentive measures as well as the beginning of scheduled spending cuts. Forecasting exactly what will happen on the fiscal front is complicated due to this November’s elections, but our guess is that there is probably a 50% chance (maybe marginally higher) that some sort of tax compromise is enacted either later this year or early next year. The likelihood of a bipartisan compromise on entitlement reform would be less likely.

Looking Past Downside Market Risks

There are a number of angles that could be taken if one wanted to emphasize potential downside market risks. In addition to concerns over rising yields, we could point to economic and debt problems in Europe, concerns over growth in China, relatively modest levels of global economic growth, weakening trends in corporate profits and escalating geopolitical tension in the Middle East.

While all of these concerns are real, we would argue that the current strong run for equities has mostly been a result of macro risks receding. We argued at the beginning of the year that as long as fundamentals were at least decent, that should be good enough for risk assets. We never believed that solid market performance would require a significant turnaround in global economic growth conditions and a continued environment of modestly positive fundamentals should remain a market-friendly one.

In our view, stocks still remain attractively valued and the market is still discounting a more negative environment than what we expect. Corporations remain flush with cash and are poised to engage in a number of shareholder-friendly activities. From an individual investor perspective, a large number of people are still underweight stocks and we have yet to see significant moves into equity mutual funds. As such, we believe we have not yet seen the end of the market’s upward moves.

About Bob Doll

Bob Doll is Chief Equity Strategist for Fundamental Equities at BlackRock^® a premier provider of global investment management, risk management and advisory services. Mr. Doll is also Lead Portfolio Manager of BlackRock’s Large Cap Series Funds. Prior to joining the firm, Mr. Doll was President and Chief Investment Officer at Merrill Lynch Investment Managers.

You should consider the investment objectives, risks, charges and expenses of any fund carefully before investing. The funds’ prospectuses and, if available, the summary prospectuses contain this and other information about the funds, and are available, along with information on other BlackRock funds by calling 800-882-0052. The prospectus and, if available, the summary prospectuses should be read carefully before investing.

The information on this web site is intended for U.S. residents only. The information provided does not constitute a solicitation of an offer to buy, or an offer to sell securities in any jurisdiction to any person to whom it is not lawful to make such an offer.

Sources: BlackRock, Bank Credit Analyst. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of March 26, 2012, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.

BlackRock is a registered trademark of BlackRock, Inc. All other trademarks are the property of their respective owners.

Prepared by BlackRock Investments, LLC, member FINRA.
NOT FDIC INSURED / MAY LOSE VALUE / NO BANK GUARANTEE

Tags: 10 Year Treasury, Bear Market, Bear Markets, Bond Market, Bond Prices, Bond Yields, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Economic News, Economic Trends, Impediment, Inflationary Environment, Interest Rate Policy, Nasdaq Composite, Overcoming Objections, Selloff, Sudden Moves, Term Interest, Upward Bias
Posted in Markets | Comments Off

The Social Media Revolution (Charles Biderman)

Tuesday, March 27th, 2012

Social media I say will create a revolution in how we govern ourselves and eventually will start the next bull market, but not for at least three to five years. I define social media as the ability for everybody on this planet to be in instant communication with everyone else.

Several of you have commented that social media is as big a breakthrough as was the personal computer in 1982. In my opinion social media is, but not until the current representative govt format, actually falls apart and unfortunately that unlikely to happen over the next few years.

Before explaining how social media will not only transform government but lay the basis for a long term bull market, I think a pre amble into the history of tech breakthroughs that caused quarter century bull markets in the past would be useful.

On my March 13 Daily Edge I said the Dow was destined to drop to around 6000 before bottoming. To arrive at that conclusion I looked at the three most recent long term bull markets.

The first quarter century bull run that started in 1904, was due to breakthroughs utilizing the ability in moving energy along a wire, called electricity; and also cheaply producing gasoline powered automobiles.

Market participants remember 1929 better than 1904 because 1929 was when the then Dow Jones Industrial Average topped out 12 times higher than the 1904 low. What happened, every economic boom throughout history sooner or later creates the excesses that requires a bear market to eliminate those excesses.

Some say it took a war to end the 13 year bear market in 1942. I say it was breakthroughs in being being able to transmit energy through airwaves, called television. Second was the breakthrough in small motors that created the modern kitchen and household appliances.

The bull run that started in 1942 was a 12 bagger that lasted through 1966 when the Dow first hit 1000. That bull market created excesses over a quarter century that it took the next 16 years to work through.

Then in 1982 storing data on a silicon chip at a price affordable by all became possible; and that led to the IBM PC and Apple II computer. Then came the internet and after that broadband. 25 years later, by October 2007 which was just four and a half years ago, the Dow at 14,000 was 18 times higher than the prior low. The excesses created during that 25 year run are still being worked off.

Here is where I pick up the thread from when I said it will take another five to eight years before Social Media starts the next long term bull market.

Representative government is the real headwind we are facing today. Representative government was created back in 1790 to solve the problem of how we could govern ourselves even before railroads, let alone telephones or the internet.. The United States was geographically so large that there was no way everybody could communicate with everybody else.

But now, social media puts all of us in real time communication with everyone else; therefore why do we need representative government to represent us. We will eventually become in charge of ourselves. To me already existing inside of social media is how we will govern ourselves as a global community.

To summarize, in 1904 we mastered electricity and big engines which allowed for urban living. The mastery of the airwaves and small motors allowed for suburbanization where you could live and work the suburbs just as effectively as in a city. Microchips and broadband allows for exurbanization, which means anyone can work from anywhere on the planet. And then social media will allow for everyone to become a responsible member of the global community.

Unfortunately, all of that will take several more years before it happens. It took 13 and 17 years to work of the excesses of the past two 25 year bull markets. That could mean it will be sometime in the next decade before the next bull run starts.

Charles Biderman
President & CEO TrimTabs Investment Research
Portfolio Manager, TrimTabs Float Shrink ETF (TTFS)

Tags: Automobiles, Bagger, Bear Market, Breakthrough, Bull Markets, Bull Run, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Economic Boom, electricity, Excesses, First Quarter, Gasoline, Household Appliances, Market Participants, Media Revolution, Modern Kitchen, Personal Computer, Quarter Century
Posted in Markets | Comments Off