October 29, 2013

TDG News: Michael Buccino of TDG Praised in The Advocate as Potential Future Leader of the City of Stamford

Michael Buccino, associate wealth advisor at The Dowling Group, is running for a seat on the Stamford, CT Board of Finance. Michael was profiled in the Stamford Advocate's Friday Editorial on the upcoming Board of Finance elections. While he is the youngest of candidates for this year's elections, he was commended on his performance in Thursday's city forum. The Stamford Advocate said of Michael, "he has familiarized himself with the city's financial challenges...he shows a welcome empathy for seniors who are struggling with rising costs...voters should pay attention to Buccino. He has done his homework and has the potential to become a city leader in the years to come." Click here to view the full article.

Michael joined the Dowling Group in 2010. He has a strong commitment to the positive development of his community here in his hometown of Stamford, CT. Michael has served as both secretary and vice-president of the Student Government Association at Eastern Connecticut State University where he graduated with a degree in Economics and was inducted into Omicron Delta Epsilon, an international honor society in the field of economics. He currently serves on the Stamford Public Education Foundation Board of Directors. Michael has completed his experience and educational requirements for Certified Financial Planner designation and will sit for the exam early next year.

Contrarians Love it When You're Wrong

Contrarians probably are waiting for the other shoe - or, in this case, U.S. stock markets - to drop.

If you're not familiar with contrarian investing, the theory goes something like this: Consensus opinion is often wrong. When the majority of investors have a bullish outlook and believe stocks are going to move higher, the chances are stock values will drop. Likewise, when the majority has a bearish outlook and believes stocks are going to move lower, the chances are stock values will rise.

Why would Contrarians expect markets to head south? One reason is bullish sentiment is high. On October 23, the American Association of Individual Investors' Investor Sentiment Survey, which measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market for the next six months, shows 49.2 percent are bullish and just 17.6 percent are bearish (the rest are neutral). The long-term averages for bullish and bearish sentiment are 39 percent and 30.5 percent, respectively.

Contrarians also are eyeballing the fact that stock markets in the United States have run up for 519 sessions without as much as a 10 percent correction, according to Barron's. That means markets have weathered bombs at the Boston marathon, chemical weapons in Syria, monetary policy uncertainty, U.S. government shutdown, and Miley Cyrus' VMA performance. Of course, 519 sessions is not the longest winning streak ever, not even close. In fact, if we assume about 250 trading sessions in a year, then the current rally would have to last until about 2018 to match the record (1,767 sessions) set between October 1990 and October 1997.

Investors aren't the only bullish faction. Money managers who participated in Barron's latest big money poll also seem to have adopted Alfred E. Neuman's motto: What, me worry? Their outlook seems to focus on the Fed's loose monetary policy. According to Barron's, "Four of five money managers in our big-money poll expect stocks to be the best-performing asset over the next year, even as 71 percent see U.S. shares as already fairly valued. Thanks to unending central bank support, we all expect above-par stock returns from sub-par economic growth."

So, what's going to happen? Only time will tell.

Data as of 10/25/13	1-Week	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor's 500 (Domestic Stocks)	0.9%	23.4%	24.5%	14.1%	15.7%	5.5%
10-year Treasury Note (Yield Only)	2.5	NA	1.8	2.6	3.7	4.3
Gold (per ounce)	2.4	-20.4	-21.4	0.3	13.9	13.3
DJ-UBS Commodity Index	-0.9	-8.3	-11.2	-4.5	0.0	0.1
DJ Equity All REIT TR Index	0.5	9.2	13.3	12.2	21.1	10.2

Where Are Interest Rates Headed?

where are interest rates headed? According to the Federal Reserve, economists assume interest rates will move toward equilibrium or a 'natural' real rate of interest that takes into account inflation over the long term.

The idea of a natural rate of interest was first introduced by Swedish economist Knut Wicksell. Recognized as an economist's economist in the late 1800s and early 1900s, Wicksell is known for his macroeconomic text Interest and Prices which noted the difference between the real rate of return on capital (aka: the natural rate of interest) and the market rate of interest (aka: the rate borrowers pay). According to The Economist:

"If the financial rate is below the natural rate, businesses can reap unlimited profits by borrowing as much as they can and plowing it into high-returning projects. Eventually, though, all that additional spending pushes up prices, money and credit, and, eventually, financial interest rates.

Wicksell saw financial rates as those set by banks competing to make loans. That job is now performed by central banks. They still think in Wicksellian terms: the natural rate prevails when the economy is at full employment. Set the policy rate above the natural rate and the economy tips into depression. Set it below, and inflation results - or, some worry, speculative credit booms."

So, where are interest rates headed? Apparently, they're going to move higher. According to the Federal Reserve's September 2013 economic projections, the federal funds rate (the rate at which banks lend to each other overnight) is expected to reach 2 percent by the end of 2016. Currently, it is at 0.25 percent. (The Fed also expects the United States will be close to full employment at that time with the unemployment rate nearing its long-term average of 5.2 to 5.8 percent.)

Weekly Focus - Think About It

"It has always seemed strange to me... the things we admire in men, kindness and generosity, openness, honesty, understanding and feeling, are the concomitants of failure in our system. And those traits we detest, sharpness, greed, acquisitiveness, meanness, egotism and self-interest, are the traits of success. And, while men admire the quality of the first, they love the produce of the second."

—John Steinbeck, Pulitzer and Nobel Prize-winning American author

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

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