|Total Returns %||
|Dow Jones Industrial Average||+2.27%||+4.45%|
|S&P 500 Index||+2.71%||+4.23%|
|U.S. Aggregate Bond Index||-1.51%||-1.41%|
|MSCI All Country World||+2.95%||+2.99%|
Source: Yahoo! Finance. Data through 2-4-11
Global markets rebounded last week in spite of the unrest in Egypt. While it is good to see Egyptians pushing for change and more freedom, it is unsettling to see the violence and the uncertainty in such a volatile spot on the planet. There was a very good article in the Financial Times on Saturday 2/5/2011 about the lack of global stock market reaction to the problems not only in Egypt, but in Tunisia and Yemen, as well. There were two main points of the article that I will attempt to summarize.
The first point is the same one I have made for weeks, and that is that the market is way overdue for a breather/correction (5-10% variety). It is one thing to have a rising market in a sound economic environment; it is another to have what we are experiencing. Typically, when the market is riding high, any excuse for a sell off will due. In this case, the turmoil in Egypt is either being discounted, or it just has not settled in with investors as a true worry.
The second point is that historically, political shocks in the Middle East which have led to recessions in the West tend to have slow initial responses (like now perhaps). The US economy can little afford a spike in oil prices.
Consider that Europe is still struggling, emerging economies are fighting inflation, oil prices are already rising, and now we are looking at considerable upheaval in the Middle East. To reinforce the point here (as well as my continued concern about the validity of the market at its current level), a very interesting study was put together by the fund manager team at Comstock Partners. They took 8 major economic indicators and compared them to where they stood 36-months ago. In addition, they looked at where the same indicators were in the last two business cycles. Here are the results:
- GDP was up an average of 6.4% from the prior peak at this point in the last two business cycles versus only .2% now
- New homes sales were up 23% then; down 47% now
- Retail sales were up 14% then; 1% now
- Industrial production was up 2.5% then; down 5.6% now
- Non-farm payroll employment was down .1% then; down 5.2% now
- Personal income was up 11% then; 4% now
- New orders for durable goods were up 6.2% then; down 2.2% now
- Initial weekly employment claims were down 8% then; up 22% now
The list above is troubling on its own, but becomes more worrisome for investors as the market has been on a tear in spite of a weak recovery. Sure there is some progress in the economy, and typically stocks lead out of a recession, but in the past there were legs for the market rise to stand on.
I remain cautious on the markets at this point as it is more likely that we see a 10% drop than a 10% gain from here. What little upside that remains in the market will be hard fought high risk returns. Patience is a key at this point. I do believe though that once a market breather takes place we will see higher highs in global markets.
Would you like an analysis of your current investment portfolio? Call me to schedule your free consultation- 913.693.7918.
John P. Chladek, MBA, CFP® is the President of Chladek Wealth Management, LLC, a fee-only financial planning and investment management firm specializing in helping families and couples who are not yet retired realize their financial goals. For more information, visit http://www.chladekwealth.com.