July 31, 2012

TDG News:

This Saturday, August 4, 2012, Sean will be swimming through the Hudson, Harlem, and East Rivers around theisland of Manhattan. He and his team will be competing in the 28.5 mile race to help raise money for Swim Free and The Greenwich Aquatic Scholarship Fund. To learn more click here. To make a donation click here.

Positive Eurozone News

"Within our mandate, the ECB is willing to do whatever it takes to preserve the euro and, believe me, it will be enough."

—Mario Draghi, European Central Bank (ECB) President

It's quite amazing how one sentence from one man can help spark a major rally in stocks, bonds, and the euro currency. Draghi's comments last Thursday in London represent a significant ramping up of the ECB's willingness to use its resources to hold the euro together and investors responded enthusiastically. On the day of Draghi's comments:

• The euro and the British pound each gained more than 1 percent against the U.S. dollar.
• Stocks were positive in nearly all European markets.
• Italian and Spanish indexes each jumped more than 5 percent.
• The Spanish 10-year bond yield dropped nearly half a percentage point from the day before and the 10-year Italian bond yield was down a similar amount.
• The S&P 500 index rallied 1.6 percent. Sources: The Wall Street Journal; CNBC

Between Draghi in Europe and Fed Chairman Ben Bernanke in the U.S., central bankers seem to be exerting an outsized influence on the markets. Normally, you expect markets to roughly trend with corporate earnings.

Speaking of earnings, several high-profile companies including Amazon, Facebook, and Starbucks, fell short on their second quarter earnings numbers released last week, according to CNBC. Overall, earnings for the companies reporting so far this quarter have been a bit on the light side, according to CNBC.

While earnings ultimately matter in the long run, today's markets seem focused on the support provided by central banks. And, yes, an up market is an up market regardless of what's propelling it. However, for long-term sustainability, we need the markets to go up based on their earnings growth - not artificial stimulus.

Data as of 7/27/12	1-Week	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor's 500 (Domestic Stocks)	1.7%	10.2%	7.3%	12.2%	-1.0%	4.4%
DJ Global ex US (Foreign Stocks)	0.9	1.4	-16.9	2.3	-6.6	5.8
10-year Treasury Note (Yield Only)	1.6	N/A	3.0	3.7	4.8	4.5
Gold (per ounce)	2.7	2.8	-0.4	19.2	19.6	18.2
DJ-UBS Commodity Index	-1.9	2.0	-13.1	5.1	-3.4	4.0
DJ Equity All REIT TR Index	1.0	17.2	13.6	29.4	4.9	11.3

Market Timing

THE BEST AND THE WORST DAYS IN THE STOCK MARKET tend to occur rather close to each other and that has major implications for how to be a successful investor.

While it's tempting to try to aggressively "time" the stock market and be in on the best days and sitting in cash on the worst days, that's not a viable strategy. The chart below shows how just a few days each decade made a profound impact on the performance of the market over that decade.

Decade	Annualized Return by Decade	Return Excluding 10 Best Days	Return Excluding 20 Best Days	Return Excluding 30 Best Days	Return Excluding 40 Best Days
1970s	1.6%	-2.3%	-5.0%	-7.2%	-9.1%
1980s	12.6	7.6	4.6	2.0	-0.4
1990s	15.3	11.0	8.0	6.0	3.0
2000s	-2.7	-9.2	-13.2	-16.9	-19.5

Source: BMO Capital Markets

For example, during the 1980s, the S&P 500 had an average annualized return of 12.6 percent. However, if you excluded the return of the 40 best days during that decade, then the return would have fallen to a negative 0.4 percent. In other words, just 40 days out of that 10-year period accounted for all of the return for the decade. Wow!

Weekly Focus - Think About It...

"The most important thing in the Olympic Games is not winning, but taking part; the essential thing in life is not conquering, but fighting well."

—Pierre de Coubertin, founder of the modern Olympic Games

Best regards,
Sean M. Dowling, CFP, EA
President, The Dowling Group Wealth Management

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