May 8, 2013

Why Markets Performed So Well Last Week

Like athletes testing their limits, the Standard & Poor's 500 and the Dow Jones Industrials Indices both hit new highs last week. The S&P closed the week above the 1,600 level for the first time, while the Dow climbed above the 15,000 mark on Friday before closing lower. Strong corporate earnings, gains in the housing market, and good news from Europe helped support last week's strong performance.

Corporate earnings season - the period when companies' managements tell shareholders how well the companies have performed during the previous quarter - is almost over. Seventy-two percent of the companies in the S&P 500 have beaten analysts' expectations, according to information provided by FactSet and reported on MarketWatch. Since 1994, about 63 percent of companies have beaten expectations on average.

Housing market news was largely positive last week. The Standard & Poor's/Case-Shiller 20-city index of home prices was up 9.3 percent year-over-year through February which was the largest gain in almost 7 years. Generally, cities that had seen big price declines during the housing crisis realized the biggest gains, including Phoenix, Las Vegas, and Atlanta. Cities experiencing strong jobs growth, such as San Francisco, Seattle, and Dallas, also showed significant price gains.

In Europe, Italy's elected leaders finally resolved their political impasse and formed a government. The highly-diverse coalition includes a record number of women, as well as Italy's first non-white minister. The new cabinet was sworn in on Sunday, April 28. On Monday, Italy's FTSE MIB, an index which reflects the performance of the Italian stock market, the MSCI World Index, and several U.S. stock markets moved higher.

Data as of 5/3/13	1-Week	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor's 500 (Domestic Stocks)	2.0%	13.2%	16.0%	10.3%	2.8%	5.7%
10-year Treasury Note (Yield Only)	1.8	N/A	1.9	3.7	3.9	3.9
Gold (per ounce)	-0.2	-13.3	-10.3	7.4	10.8	15.7
DJ-UBS Commodity Index	0.9	-4.3	-3.7	-0.5	-8.8	1.6
DJ Equity All REIT TR Index	2.0	15.0	20.8	15.9	6.7	12.5

Does money buy happiness ... or doesn't it? Many years ago, Richard Easterlin, a Professor of Economics at the University of Southern California, studied the relationship between happiness and money. He found that, over shorter periods of time, happiness and income tend to move in tandem. "Happiness tends to fall in economic contractions and rise in expansions."

Over longer periods of time, he found satisfaction with life (i.e., happiness) had little relationship to rates of economic growth (i.e., people having more money). The conclusion was once people have enough money to meet basic needs, they are as happy as they are going to be.

A recent paper from the National Bureau of Economic Research, written by economists Betsey Stevenson and Justin Wolfers of the University of Michigan, appears to cast doubt on Easterlin's happiness-income paradox. The authors relied on data from Gallup polls which asked people throughout the world how much they earned and on which rung of the happiness ladder they were perched. While people in some countries appeared to be happier than people in other countries, everyone - no matter how much money they had - was happier when they had more money.

So, does more money translate into more happiness or doesn't it?

It may all come down to your definition of happiness. After all, well-being is subjective as Princeton's Professor of Psychology and Public Affairs, Daniel Kahneman, and its Professor of Economics and International Affairs, Angus Deaton, pointed out in a 2012 paper. The pair evaluated two measures of happiness: life evaluation (satisfaction with your place in the world) and emotional well-being (day-to-day happiness). The researchers found that life evaluation increases steadily with income, while day-to-day happiness maxes out an annual income of $75,000. They concluded "high income buys life satisfaction but not happiness, and low income is associated both with low life evaluation and low emotional well-being."

Weekly Focus - Think About It

"All I ask is the chance to prove that money can't make me happy."

—Spike Milligan, British comedian

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

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