June 11, 2013

Contorted Market Responses to Economic News

Like a funhouse mirror, investors' concerns about whether and when the Federal Reserve will begin to end its quantitative easing program contorted market responses to economic news last week. Unexceptional economic reports were treated as good news and pushed stock markets higher; strong economic reports were treated as bad news and pushed stock markets lower.

Markets headed south mid-week, but responded positively to the U.S. May jobs report. It was a Goldilocks report - neither too weak nor too strong - which showed the Labor Department added slightly more jobs than expected in May. Apparently, investors thought the increase was not large enough to spur the Federal Reserve to early action on quantitative easing, and U.S. stock markets finished the week higher. The Dow Jones Industrial Average was up 0.9 percent, the Standard & Poor's 500 Index gained 0.8 percent, and the NASDAQ rose 0.4 percent.

Uncertainty about the future of quantitative easing has created volatility in U.S. bond markets during the past few weeks. Concerns the Fed could begin tapering sooner rather than later, triggered a sharp increase in bond yields during that period. In addition, several new offerings in the municipal bond market - issued by cities and states, municipal bonds typically are exempt from federal tax - have been scaled back or postponed because of market uncertainty.

If concerns about the end of quantitative easing continue to dominate, it's possible markets may continue to respond to economic news in unexpected ways. So, what's on deck for next week? Economic news should include the May retail sales report, initial June consumer sentiment reading, and inflation data.

Data as of 6/7/13	1-Week	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor's 500 (Domestic Stocks)	0.8%	15.2%	25.0%	16.1%	3.8%	5.4%
10-year Treasury Note (Yield Only)	2.2	N/A	1.7	3.2	4.0	3.3
Gold (per ounce)	-0.6	-18.2	-12.6	4.5	9.1	14.4
DJ-UBS Commodity Index	0.5	-5.6	1.6	2.4	-9.9	0.9
DJ Equity All REIT TR Index	-0.1	7.9	18.5	19.5	6.6	11.2

IS INVESTING IN THE STOCK MARKET MORE LIKE GOLF OR TENNIS? Every sport has a certain way to measure performance. For example:

• Running is based on time.
• The high jump is based on feet and inches.
• Football and basketball are based on points.
• Baseball is based on runs.
• The decathlon is based on the cumulative score from 10 different events.

So, how do we measure success as an investor?

A recent report from Invesco used golf and tennis as an analogy for how to win as an investor. The report pointed out tennis is scored using match play, meaning your performance is measured at intervals along the way. (1) You can win games, which leads to winning sets, which leads to winning the match. In effect, tennis players have to win along the way in order to win at the end of the match.

By contrast, golf is scored using stroke play, meaning it doesn't matter who wins any particular hole. Rather, the winner is determined by who has the lowest cumulative score at the end of the round or match.

Despite their different scoring systems, people who win at golf and tennis still need to perform somewhat consistently throughout their performance. Tennis players can't play great for 3 games and then poorly in 4 games and still win the set. Likewise, golfers who triple bogey 12 holes and birdie 6 holes probably won't win the club championship.

Now, before we can determine whether winning as an investor is more like golf or tennis, we have to define what "winning as an investor" means. Simply put, we can define winning as an investor to mean you've achieved your financial goals within the timeframe you've identified and at a risk level that was acceptable to you.

Using that definition, winning as an investor is more like winning at golf than tennis.

In golf, the winner is determined at the end of the round or match and who won each individual hole does not matter. Likewise, a winning investor "wins" when they've achieved their goals by the end of the specified period.

Of course, real life investing is not so neat and tidy. Just like golfers sometimes take a triple bogey, the stock market sometimes takes a big drop. And, while nobody likes to see these declines, it's important to understand they will happen.

In addition, golfers are sometimes tied at the end of a tournament so they have to play extra holes. Similarly, the financial markets occasionally experience extended declines which may mean it will take investors longer to reach their goals than originally planned.

Consider this, too: golfers have numerous clubs in their bag they can use depending on how far they are from the hole, their lie, and any obstacles that may be in their way (e.g., a tree). On the tee at a par 5 hole, for example, a golfer might take out a driver because they have a long way to go. Likewise, for clients who are a long way from retirement, we might more heavily weigh equities in an effort to pursue a greater return. Conversely, a golfer on the green facing a 3-foot putt would pull out a putter instead of a driver while accepting more risk. Likewise, if you're in retirement, there are certain asset classes with risk and return characteristics that may be more suited to your portfolio than a heavy allocation to equities.

Golf, tennis, and investing have a lot in common. They can all be played competitively and competitive people like to keep score and win. As a "competitive" advisor, we do our best to"win" the investment game on your behalf so you can spend more of your time doing what you enjoy the most... which might include golf or tennis!

(Investing in securities is subject to market fluctuation and possible loss of principal. No strategy assures success or protects against loss.)

Weekly Focus - Think About It

"I've learned that people will forget what you said, people will forget what you did, but people will never forget how you made them feel."

—Maya Angelou, American author and poet

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

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