Phillips File

August 31, 2011

A set of encouraging economic reports on Wednesday propelled stocks to their fourth straight winning session as one of the market’s wildest months ever came to a close. The reports showed an increase in private-sector hiring, better-than-expected manufacturing activity in the Chicago area and an increase in factory orders nationwide – all good signs for investors who have alternated between fear and hope throughout the month. However, stocks were negatively impacted after the Justice Department sued to block AT&T’s proposed $39 billion takeover of T-Mobile USA Inc. and the Greek parliament said a worsening recession will weigh on the country’s debt.

Investors were rocked by a string of bad news early in the month as Washington’s brinksmanship over the debt ceiling was followed by Standard & Poor’s historic downgrade of the United States’ credit rating. Those events intensified an ongoing market correction that by August 8 saw the S&P 500 down 18% from its late-April high point. The market gyrated wildly all that week, with the roller-coaster ride continuing until August 22, when stocks finally settled down and began a recovery that left them essentially unchanged for the year but down for the month, as the chart below shows.

	8/31/11 Close	7/29/11 Close	Change	Gain/Loss
DJIA	11,613.50	12,143.24	-529.74	-4.36%
NASDAQ	2579.46	2,756.38	-176.92	-6.41%
S&P 500	1218.89	1,292.28	-73.39	-5.68%

Investors who had been hoping for additional stimulus from the Federal Reserve Board were disappointed last week when Fed Chairman Ben Bernanke, who one year ago announced the monetary stimulus known as QE2, this year said only that the central bank would keep interest rates low through 2013 and consider additional measures. With unemployment remaining high, investors are now looking ahead to September 7, when President Obama has scheduled a major speech on jobs, and to the Fed’s next meeting, which has been expanded to two days and takes place September 20-21.

The market continues to be torn between two opposing viewpoints. Many investors fear that feeble U.S. economic growth could turn into another recession and that the eurozone’s debt problems could escalate, damaging the global economy. Others point to the reality that corporate earnings and balance sheets are very strong and note that authorities are clearly aware of the risks to economic growth. Two important economic indicators come in later this week, a national manufacturing activity survey on Thursday and on Friday, the Labor Department’s August employment situation report.

I am continuing to pay close attention to the economy and the overall investment environment, but if you have any immediate concerns about your financial plan, please give me a call.

August 10, 2011

The intense volatility that has recently gripped U.S. and global stock markets was much in evidence this week. Stocks staged a broad retreat Wednesday after rallying strongly Tuesday when the Federal Reserve Board pledged to keep interest rates near zero through 2013. Tuesday’s advance followed a dramatic selloff on Monday, the first day of trading on U.S. exchanges after Standard & Poors announced it was stripping the U.S. of its AAA credit rating.

The sharp swings in stock prices – the Dow Jones Industrial Average dropped 5.5% on Monday, rose 4% on Tuesday, and fell more than 4% Wednesday – demonstrate the uncertainties plaguing investors. The Fed said it was prepared to employ its policy tools “as appropriate” – a reference some investors took to mean additional monetary stimulus inthe form of QE3 might be on the table. However, the central bank also acknowledged that U.S. economic “growth so far this year has been considerably slower” than it had expected, a reminder of the difficulties besetting the economy.

While economic uncertainty and market volatility seem likely to remain with us for the foreseeable future, it’s also important to remember some key facts:

Although the S&P downgrade was of course unwelcome, investors worldwide still regard U.S. government debt obligations as safe and highly attractive. For example, the Treasury sold $24 billion worth of 10-year notes Wednesday at an extremely low yield of 2.14%. If investors were truly worried about a U.S. default, they would be demanding much higher yields. While much criticized, the recent agreement in Washington raising the debt ceiling ended the immediate question of default.
Corporate earnings are robust, with some 61% of S&P 500 companies reporting so far beating their second-quarter earnings estimates, and 68% exceeding their revenue estimates. Corporate profit margins and balance sheets are also very strong.
While U.S. economic growth has slowed, as yet there is no solid evidence that the country is sliding into recession. This view is reinforced by the fact that long-term interest rates remain well above short-term rates. Every U.S. recession in the past 50 years has been preceded by an inverted yield curve (short-term interest rates above long-term interest rates).
Markets often overreact in times of uncertainty, and investment decisions made in haste during periods of anxiety are often regretted later on.

It’s normal to be concerned during periods of extreme market volatility. However, while investors must always be alert to changes in the economic and investment climate, market fluctuations are not a valid reason for abandoning your long-term financial plan. This is a time for calm, for close communication with your financial advisor, and a time to remember that while stocks may fluctuate sharply in the short term, they have generally rewarded patient investors over the long term.

The ongoing volatility in the markets is obviously something I am watching very closely. In times like this, we must strike a balance between vigilance, which is certainly warranted, and emotional response, which is not. If you would like to discuss the current investment environment or have any concerns about your individual holdings, please give me a call.

July 29, 2011

Yes, I am paying close attention to the debt ceiling and the possible downgrade to the US treasury ratings. Here are my thoughts, not company written boiler plate materials. I am happy to elaborate, but not by email. I would rather talk by phone to truly address any issues you might have.

For most of the people who have been around investing for any length of time and these issues, they are treating this as a non-event. We all understand brinkmanship is the way things get done in Washington. Unfortunately, this means our elected officials are playing chicken with something they ought not...ever. But it is what it is.

Remember, you do not hire me for my political advice. What you hire me for is my understanding of your goals and objectives and the most suitable portfolios and managers to help you met your goals. I am confident in the professionals I have chosen to surround my investors, and their forward looking market assumptions and the specific companies selected by your managers.

This could get ugly over the next week. It goes back to my basic premise: there is no such thing as true security, but simply managing risk. The whole reason you have a diversified portfolio and cash reserves is to keep you from reacting to short term hysteria. You will continue to receive/reinvest your dividends. If you are taking dividends, you will continue to receive them. You are not invested “in the market”, but a thought out portfolio designed for you. And if you are investing monthly, well good for you, you are picking up some good buys during times like this.

Turn on some music, go visit a friend, take a walk, but turn off the TV.

June 24, 2011

Stocks fell broadly before recovering in late trading Thursday as investors reacted to negative news on a number of fronts. On Wednesday came a downbeat assessment of the U.S. economy by Fed Chairman Ben Bernanke, and on Thursday a surprise announcement that the U.S. would tap into its Strategic Petroleum Reserve as part of an international effort to counteract oil shortages stemming from the ongoing conflict in Libya and unrest elsewhere in the Middle East. The Dow Jones Industrials, which had been down almost 235 points during midday trading, finished 59.67 points lower at 12,050. Other major averages traced similar moves.

Positive news has been in short supply lately, with equities in a generally declining trend since the end of April. Stocks sold off somewhat yesterday after Bernanke said the Fed was making what he characterized as “fairly significant” reductions in its economic growth forecasts for 2011 and 2012. The central bank now expects growth this year of up to 2.9%, down from its April projection of up to 3.3% and its January forecast of up to 3.9%. In other words, the Fed has lowered its 2011 forecast a full percentage point since the first of the year.

For 2012, the Fed reduced its growth forecast to 3.7%, down from 4% previously. Bernanke also said the U.S. economy is “still years away” from full employment, which is generally defined as an unemployment rate of about 5%, well below the current rate of 9.1%. The Labor Department also said Thursday that initial claims for unemployment insurance were up 9,000 to 429,000 last week, higher than most analysts had anticipated.

Bernanke’s views added to the anxieties of investors already concerned about the end of the Fed’s QE2 stimulus program, stresses in the eurozone surrounding Greece’s severe financial problems, and the ongoing impasse in Washington over cutting the nation’s budget deficit and raising the debt ceiling. News of the oil initiative, while welcome in terms of reducing supply strains and immediately lowering prices, also served as a stark reminder of the world’s reliance on an unstable region for this critical commodity. However, equity investors came back in after a late-session report that Greece had agreed with the International Monetary Fund and the European Union on a five-year austerity plan.

Although economic and geopolitical uncertainties are obviously weighing on investors, it’s also true that corporate profits remain strong, interest rates are low and the U.S. economy is growing, albeit slowly. Second-quarter earnings reports, which are about to commence, may provide more clarity on how companies are actually faring.

While dramatic market fluctuations are never pleasant, they are also not a good reason to hastily deviate from your long-term financial plan. Volatile market swings can be unsettling, but keeping an eye on your asset allocation targets can help keep things in perspective and remind you of the role equities play in a balanced portfolio. If you’d like to discuss your investment portfolio – or if you have any other questions or concerns about your overall financial plan – please give me a call.

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