November 26, 2013
What Did You Expect?
Okay. Okay. If you've been trekking through Siberia or Patagonia for about a year, then maybe it surprised you to hear the minutes from the Federal Reserve Open Market Committee meeting showed it expects to begin tapering Quantitative Easing (QE) in the coming months.
However, since the Fed has been telling anyone who will listen - telling them over and over and over again - that its intent is to slow the pace at which it buys bonds as the U.S. economy strengthens (and since most people haven't been exploring the hinterlands where the convenience of modern communications may not be readily available), it's difficult to understand why that information was so surprising that it pushed stock and bond markets significantly lower.
It might have been easier to understand market declines if they had occurred on Tuesday after the Organization for Economic Cooperation and Development (OECD) released its revised economic outlook. In his speech, OECD Secretary-General Angel Gurría said:
"The recovery of the global economy is progressing at a moderate and uneven pace. World GDP growth, which averaged about 4 percent per year in the decade up to the onset of the global crisis, is expected to reach only 2.7% in 2013, the lowest rate since 2009. While we expect global growth rates to move again towards 4 percent in 2015, the world will continue to be affected by the harsh social legacy of the crisis... The recovery itself is exposed to potential downside risks, including fiscal brinkmanship in the United States, unresolved banking problems in the euro area, the high debt burden in Japan, and financial vulnerabilities in some large emerging-market economies."
Gurría also said, in the OECD's long-term view, economic weakness was the result of investment remaining anemic, credit growth remaining subdued, trade growth gaining sluggishly, and growth in emerging economies faltering.
Regardless, the markets' downward foray was short-lived. On Friday, the Standard & Poor's 500 Index closed above 1800 for the very first time. Other U.S. markets moved higher as well.
|Data as of 11/22/13||1-Week||Y-T-D||1-Year||3-Year||5-Year||10-Year|
|Standard & Poor's 500 (Domestic Stocks)||0.4%||26.5%||28.1%||14.6%||16.2%||5.6%|
|10-year Treasury Note (Yield Only)||2.8||NA||1.7||2.8||3.3||4.2|
|Gold (per ounce)||-3.2||-26.4||-28.0||-2.8||8.7||12.3|
|DJ-UBS Commodity Index||0.5||-11.0||-14.1||-5.1||0.0||-0.1|
|DJ Equity All REIT TR Index||-2.1||2.8||6.9||11.5||21.3||9.2|
Notes: S&P 500, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron's, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.
Virtual Money (AKA The Bitcoin)
An oh-so-brief brief on digital money... If you read or watched the news during the past few months, you may already know this, but there has been an explosion of interest in digital money. That's the reason you may be hearing and reading about dozens of companies that are rushing to coin virtual currency that has real value. It just seems so 21st Century, doesn't it?
Odds are you've already used digital money. For example, you used it the last time you purchased something online. Digital money is what we use when we pay or are paid electronically. Think smart phones and credit cards. Digital money is not tangible; however, it is possible to convert digital money that is part of a large centralized banking system into paper money by making a withdrawal from an ATM.
In the United States, the Federal Reserve is responsible for maintaining the integrity of U.S. bills and coins by setting monetary policy. Digital currency companies offer a parallel currency universe; a means of transferring electronic money from one person to another without using traditional banking or money-transfer systems.
Digital money companies appear to be delivering American economist Milton Friedman's dream, according to The Economist. Years ago, Friedman suggested the Federal Reserve be abolished and replaced by an automated system that would increase money supply at a steady, pre-set rate. He believed such a system would better control inflation, making spending and investment decisions more certain. The Economist article said:
"In theory, then, the system ought to keep a lid on inflation - making it attractive to critics of interventionist monetary policy of the sort practiced since 2008 by America's Federal Reserve under the label quantitative easing... It offers other apparent benefits, too. The currency can be used by anyone (unlike credit cards, for instance), anywhere. Transaction costs are also likely to be lower than those for traditional payment systems, though these are not in fact zero..."
The Economist goes on to point out a key difference between central-bank-controlled currencies (which often offer both bills and coins and digital currencies) and digital currency companies is the former are backed by a country's regulations and laws; the latter are answerable to online communities using the currencies.
Weekly Focus - Think About It
"A business that makes nothing but money is a poor business."
—Henry Ford, American Industrialist
Sean M. Dowling, CFP, EA
President, The Dowling Group Wealth Management
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- The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
- The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
- Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.
- This newsletter was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the named broker/dealer.
- The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
- The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
- Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
- Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
- Past performance does not guarantee future results.
- You cannot invest directly in an index.
- The S&P 500 is an unmanaged indenx. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
- Consult your financial professional before making any investment decision.
- This newsletter was prepared by Peak Advisor Alliance
- Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
- Stock investing involves risk including loss of principal.
ADV & Investment Objectives: Please contact The Dowling Group if there are any changes in your financial situation or investment objectives, or if you wish to impose, add or modify any reasonable restrictions to the management of your account. Our current disclosure statement is set forth on Part II of Form ADV and is available for your review upon request.
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