News & Market Information for Financial Investorshttp://www.danielstansey.com/financial-market-updates-blog/en-US2012-02-12T22:01:00ZSquarespace Site Server v5.11.81 (http://www.squarespace.com/)Third Quarter 2011http://www.danielstansey.com/financial-market-updates-blog/2011/10/20/third-quarter-2011.htmlDaniels & Tansey Master Account2011-10-20T21:17:12ZThe third quarter can best be described as a perfect storm of events that caused global stock markets to decline by the largest percentage since the first quarter of 2009. In August, as the world economy began to slow and the European debt crisis intensified, the political system in Europe appeared to be in disarray and the U.S. faced political gridlock over the debt ceiling negotiations and budget deficit. Manufacturing data in China, the key engine for the world economy, weakened. As a result, investor confidence took a nosedive leading to panic liquidations of risk-based assets. All of this increased the risk of recession. 

]]>October 4, 2011http://www.danielstansey.com/financial-market-updates-blog/2011/10/11/october-4-2011.htmlDaniels & Tansey Master Account2011-10-11T15:04:09Z

We believe the equity markets have overshot to the downside. The markets are very oversold due to excessive worry and fear that are not supported by economic fundamentals in the U.S. The recent U.S. economic data is not consistent with a recession and yet the market is pricing for one. Fed Chairman Bernanke reiterated this morning in testimony to Congress’ Joint Economic Committee that the “Fed will continue to closely monitor economic developments and is prepared to take further action as appropriate to promote a stronger economic recovery in a context of price stability”.

We do not believe that this is or will become 2008 all over again. Equities are cheap, monetary stimulus is abundant, interest rates are at historical lows, and the world economy is still expanding, although at a much slower rate than last year. In August, we had a perfect storm of events causing the S&P 500 to drop over 18%. As the world economy began to slow and the European debt crisis intensified, the political system in Europe appeared to be in disarray and the U.S. faced political gridlock over the debt ceiling negotiations and budget deficit. Investor confidence took a nosedive leading to panic liquidations of risk-based assets. All of this increased the risk of recession. 

However, during this period of extreme uncertainty, it is important to keep in mind the following positive developments. Oil prices have fallen 33% from their April highs. The ISM services and manufacturing indices are both signaling expansion. Retail sales are growing at 3.8%. Money supply growth as measured by M2 is expanding. Interest rates are at historic lows. The banking system is much better capitalized and less leveraged than 3 years ago. Corporate balance sheet fundamentals have never been stronger with cash positions at all-time highs and debt refinanced at historically low rates. 

Although the U.S. economy is moving at a snail’s pace, it is not contracting. Much of the market’s current anxiety is due to the political posturing in Europe with what to do about a bailout of Greece and preventing a liquidity squeeze within the European banking system and Italy. At this point in time, we believe the EU finance ministers, the ECB, and the IMF will find a way to contain the debt crisis and recapitalize the European banking system. However, the process will most likely remain slow and volatile. Until signs emerge that this is indeed what will happen, we are remaining defensive and underweight risk-based assets.

As of this writing, the S&P 500 Index is finding support above the 1090 level which would mark a 20% drop from this year’s high reached on April 29th (1363) and meet the technical definition of a bear market. If we close below the 1090 level, then we could be in for more downside from here and we’ll look to further reduce risk-based asset exposure. If the market holds above this key support level (1090), then we are comfortable with our current tactical positioning and may look to further change the composition of specific asset classes (i.e. favor income over growth) in the near future.

Andrew C. Zimmerman Chief Investment Strategist

Notes: The DT Investment Partners’ Market Commentary discusses general developments, financial events in the news and broad investment principles. It is provided for information purposes only. The material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Investments in various asset classes entail different investment risks. For example, small cap equities tend to be more volatile than large or mid-cap equities.  International equities and emerging markets have exposure to currency fluctuations, foreign taxes, political instability and the possibility for illiquid markets.  Fixed income investments involve interest rate and credit risks among others. Real estate investing includes risks such as declines in value of real estate, changing economic conditions, tax laws or property taxes. Commodities’ investing is highly volatile and subject to changing economic conditions and the vagaries of speculators among other risks. Further, diversification and strategic or tactical allocation do not assure profit or protect against loss in declining markets. Index performance returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index.  Past performance does not guarantee future results.

]]>August 8, 2011http://www.danielstansey.com/financial-market-updates-blog/2011/8/11/august-8-2011.htmlDaniels & Tansey Master Account2011-08-11T19:31:34Z

Today was another tough day for risk-based assets.  The S&P 500 Index dropped 6.6% on the day and is now down 11% year-to-date. On Friday evening, after the U.S. stock markets closed, S&P decided to downgrade the U.S.’s long-term credit rating one notch to AA+ from AAA. S&P said the downgrade "reflects our opinion that the fiscal consolidation plan that Congress and the administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics." It also blamed the weakened "effectiveness, stability, and predictability" of U.S. policy making and political institutions at a time when challenges are mounting.

It's possible the blow in the short run might be more psychological than practical. Over the weekend, rival ratings firms Moody's Investors Service and Fitch Ratings both stated that they would be maintaining their top-notch ratings for U.S. debt. And so far, U.S. Treasury bonds have remained a haven for investors worried about the health of the U.S. economy and the state of Europe's debt crisis. 

Nevertheless, this downgrade is an event that is difficult to quantify in terms of its short and long-term effects.  It is for this reason that today we reduced exposure to risk-based assets across all asset allocation strategies (Ultra-Conservative, Conservative, Moderate, Aggressive and Opportunistic) by another 5% to 7.5%. 

There has been no immediate direction for the redeployment of this cash as we are currently in the principal protection mode, rather than focusing on capital appreciation. It is our belief that this volatility will ultimately create opportunities for growth in the future. However, until there is more clarity on the situation, discretion is the better part of valor. If the situation continues to deteriorate, we are prepared to trim risk-based assets even more aggressively. For now, we feel comfortable with our reduced weightings.  We will continue to communicate our views as the situation evolves and appreciate the faith you have placed in our firm.

Jonathan D. Smith, CFA

Chief Investment Officer

 

Andrew C. Zimmerman

Chief Investment Strategist

 

Notes: The DT Investment Partners’ Market Commentary discusses general developments, financial events in the news and broad investment principles. It is provided for information purposes only. The material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Investments in various asset classes entail different investment risks. For example, small cap equities tend to be more volatile than large or mid-cap equities.  International equities and emerging markets have exposure to currency fluctuations, foreign taxes, political instability and the possibility for illiquid markets.  Fixed income investments involve interest rate and credit risks among others. Real estate investing includes risks such as declines in value of real estate, changing economic conditions, tax laws or property taxes. Commodities’ investing is highly volatile and subject to changing economic conditions and the vagaries of speculators among other risks. Further, diversification and strategic or tactical allocation do not assure profit or protect against loss in declining markets. Index performance returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index.  Past performance does not guarantee future results.

]]>August 4, 2011http://www.danielstansey.com/financial-market-updates-blog/2011/8/11/august-4-2011.htmlDaniels & Tansey Master Account2011-08-11T18:30:52Z

Bad Day…..  

There is no denying that we have all had bad days in our lives and today was one such day if you own any financial asset class with a degree of risk.  It is important during “the bad times” to gain a sense of perspective as the behavioral side of things can start to overwhelm us all.  Since July 11th, the S&P 500 has lost approximately 11% of its value with almost 5% of that move occurring today. With such impactful numbers in a short period of time, the knee-jerk reaction is to say, “I can’t take it anymore just get me out!”  This is the precise time that we need to gain a sense of perspective on not only where we believe we are going, but also where we have come from.

Some Perspective…...

Chart#1

 

Chart #1 shows that while the S&P 500 Index has seen a significant drop in the last month, it is not the first time this year we have witnessed a precipitous decline. There have been two such additional episodes during the year accounting for a 6%+ fall and a 7%+ drop. What’s also interesting is that the return pattern in each quarter has also been similar in that the market took the first month to rise, then fall in the second month, and lastly recover to some degree in the third month.  The positive news (and here’s the perspective) is that each time we were starting from a higher price point than on January 1st. In addition, the large drop in interest rates has caused fixed income securities to experience a large price rally. Therefore, if an investor had any sort of balance to their portfolio, they had an offset to the decline in risk-based assets.  This is the essence of asset allocation, as a way to reduce risk by adding asset classes that behave differently in different market environments.  

In terms of gaining some perspective on a year-to-date basis, we have clients that run the gambit from fixed income-only to aggressive asset allocation strategies.  When looking at estimates of our various models on a year-to-date basis, our perspective and peace of mind comes from the fact that even with today’s downward move, fixed income and ultra conservative asset allocation clients still have a positive rate of return on a year-to-date basis. Conservative Growth & Income clients are nearly breakeven and Moderate Growth & Income clients are down approximately 1%.  When you view that on the heels of two strong double-digit return years (2009 and 2010) for Conservative and Moderate investors, a modest respite is to be expected.

Road Map…..

Where do we go from here? There’s no denying that there are worrying factors in the marketplace as my colleague Andrew Zimmerman identified in yesterday’s market update (dated August 3, 2011).  In addition to the macroeconomic environment, volatility increases of the magnitude witnessed today cannot and will not be ignored. The pundits say that a 10% move is a correction and a 20% move is the beginning of a new bear market. Our job is to identify the factors that could contribute to a new bear market without waiting for the 20% move.  Over the last few months we have been reducing risk, but not to the degree we would if we felt we were entering a new bear market in risk-based assets.  Rest assured, our day-to­day lives are now spent building a decision tree of important economic events and their impact on moving us closer to a renewed recession or strengthening the drivers of growth and recovery.  We are currently of the belief that we are at the low end of a trading range in risk-based assets and will recover from these levels.  While this is our belief now, please know that we are evaluating all of the events that are occurring on a real-time basis and are prepared to aggressively reduce risk if the situation warrants.

Jonathan D. Smith, CFA

Chief Investment Officer

Notes: The DT Investment Partners’ Market Commentary discusses general developments, financial events in the news and broad investment principles. It is provided for information purposes only. The material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Investments in various asset classes entail different investment risks. For example, small cap equities tend to be more volatile than large or mid-cap equities.  International equities and emerging markets have exposure to currency fluctuations, foreign taxes, political instability and the possibility for illiquid markets.  Fixed income investments involve interest rate and credit risks among others. Real estate investing includes risks such as declines in value of real estate, changing economic conditions, tax laws or property taxes. Commodities’ investing is highly volatile and subject to changing economic conditions and the vagaries of speculators among other risks. Further, diversification and strategic or tactical allocation do not assure profit or protect against loss in declining markets. Index performance returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index.  Past performance does not guarantee future results.
]]>Second Quarter 2011 Financial Market Commentaryhttp://www.danielstansey.com/financial-market-updates-blog/2011/7/22/second-quarter-2011-financial-market-commentary.htmlDaniels & Tansey Master Account2011-07-22T16:34:01ZAnxiety over a slowdown in the global economic expansion, political quarreling about the U.S. debt ceiling and European sovereign debt woes resulted in a turbulent second quarter for global stock markets. The S&P 500 Index rose 3% in April, fell 1% in May, and fell 1.7% in June to finish the quarter up .10%.

Commodities led risk-based asset markets lower in price as crude oil fell 12%. U.S. Mid-Cap, Small-Cap, and Emerging Market stocks all posted negative returns for the quarter ranging from -0.73% to -1.61%. Real Estate Investment Trusts (REITs) were the top performing asset class as demand for multi-family housing (apartments) firmed and investors sought the relatively attractive dividend yields from these securities. The performance of REITs was followed closely by that of investment-grade bonds, particularly corporate bonds, mortgage-backed securities, and municipal bonds maturing in 5-7 years. (See Table #1).

TABLE #1:  2011 2nd Quarter and 1 Year Ending June 30th - Asset Class Index Returns

 

Large Cap Equities

Mid-Cap Equities

Small Cap Equities

Int’l Equities

Emerging Equities

Intermediate Bonds

High Yield Bonds

Real Estate

Commodities

Cash

2Q

2011

0.10%

-0.73%

-1.61%

1.80%

-1.10%

2.14%

1.00%

2.90%

-7.94%

.04%

1 YR Ending 6/30/11

30.69%

39.38%

37.41%

31.02%

27.85%

3.95%

15.31%

34.09%

26.11%

.16%

*Source: Bloomberg and Merrill Lynch Indices

In the second quarter, investor sentiment swung from optimism regarding the global economic expansion to worries about the duration and magnitude of the economic soft patch that followed the rising oil prices and natural disaster in Japan during the first quarter. During the latter half of May and most of June, stocks underwent a gradual sell-off as weaker economic reports emerged on jobs, manufacturing, and housing.  Apprehension grew regarding the future direction of  interest rates once the Federal Reserve stopped buying bonds on June 30th (QE2 - quantitative easing). In addition, concerns over Congress not agreeing to raise the $14.3 trillion U.S. debt limit before Aug. 2, and the potential for Greece to default on its government debt have investors feeling uneasy.

Near the end of May, we decided to sell our entire position (2.5%) in the PowerShares QQQ Trust (Nasdaq 100 Index ETF) across all Conservative, Moderate, and Aggressive asset allocation strategies. A majority of the proceeds (2%) were invested in XLP (Consumer Staples Select Sector SPDR ETF). The remaining .5% was reinvested in the money market mutual fund. We sold QQQ to reduce portfolio volatility as corporate profit growth was beginning to show signs of slowing. A majority of the proceeds were invested in the U.S. Large Cap Consumer Staples sector. We view this sector-specific ETF as a defensive holding that will become a core investment within our strategic target for U.S. Large Cap stocks.

Secondly, we sold our entire position (2-4%) in GNR (S&P Global Natural Resources ETF) across all Conservative, Moderate, and Aggressive asset allocation strategies. Proceeds were invested in DBC (PowerShares DB Commodity Index ETF). GNR was sold because it had a large index tracking error to the commodities markets. DBC should provide good long-term exposure to a diversified basket (energy, agriculture, industrial and precious metals) of 14 commodities. This ETF primarily utilizes futures contracts on a long-only basis, to track the price movements of commodities.  It has historically exhibited low to negative correlation to stocks and bonds and a high correlation to inflation. It will become the core investment allocation within our strategic target for Commodities.

After rising nearly 90% (S&P 500) since March 2009, the financial markets were certainly due for a breather. We do not believe that we are on the verge of a new bear market and stocks should resume advancing again. However, we may have reached the maturity stage of the cyclical bull market in stocks and the price trend may be much flatter than it’s been over the past 25 months. The global economy has hit a mid-cycle economic slowdown that may last for a period of months. This economic slowdown should be transitory and a double-dip recession will likely be avoided. Stocks and the economy may soon get a boost as oil prices have retreated from the highs reached in April.

 Risk-based assets are sure to remain volatile until the U.S. government can reach a deal on reducing the deficit and raising the $14.3 trillion debt ceiling before U.S. borrowing authority expires on August 2nd. Clearly and certainly, a government default would be disastrous for both the U.S. and global economy. Federal Reserve Chairman Ben S. Bernanke told the House Financial Services Committee last week that failure to raise the debt limit would lead to a “huge financial calamity” that could add to unemployment.

 

Because the consequences of not doing so would be so devastating, we believe that at some point, within the next few days, the political gamesmanship will give way to a deal that raises the debt ceiling. Presently, stocks are volatile, but appear to be more worried about whether the Federal Reserve will provide additional stimulus should the economy need it, than if the government will raise the debt ceiling.

 

The sovereign debt situations in Greece, Ireland, Portugal, Spain, and Italy are sure to keep volatility high for the remainder of the year. However, we believe that most of the economic slowdown in the first half of the year was attributable to the temporary shocks of higher fuel prices and the natural disaster in Japan leading to slower consumption. Japan is projected to resume pre-natural disaster production levels by the third quarter and signs of pent up demand in the global economy are beginning to emerge.

 

We are currently positioned with a 5% underweight to the strategic targets for risk-based (stocks, real estate, commodities, & high yield bonds) investments across all asset allocation strategies. The present and near-term investment environment will require investment managers to be very tactical and flexible as sector selection will be crucial for generating solid performance. The primary reason we are not equal or overweight risk-based assets is because we believe price volatility will be on the rise in the near term for the previously stated reasons. Within risk-based assets, we still favor U.S. Large Cap stocks based upon their relative and absolute valuations, our cyclical outlook for the global economy, and our technical model indicators. Within the U.S. Large Cap sector, we have made our allocation more defensive by adding consumer staples and utility sector exchange-traded funds, while reducing broad market exposure. We are overweight principal preservation and income-oriented assets while we await an improvement in the risk–reward tradeoff.   In our investment grade bond allocation, we continue to keep duration shorter than the benchmark index and remain overweight in opportunistic, absolute return strategies as we believe there is only one direction (higher) for interest rates to go. Maintaining a flexible approach to tactical asset allocation will be critical to portfolio success for the remainder of this year.

 

Andrew Zimmerman – Chief Investment Strategist

 

Notes: The Daniels + Tansey Market Commentary discusses general developments, financial events in the news and broad investment principles. It is provided for information purposes only.  The material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Investments in various asset classes entail different investment risks. For example, small cap equities tend to be more volatile than large or mid-cap equities.  International equities and emerging markets have exposure to currency fluctuations, foreign taxes, political instability and the possibility for illiquid markets.  Fixed income investments involve interest rate and credit risks among others. Real estate investing includes risks such as declines in value of real estate, changing economic conditions, tax laws or property taxes. Commodities’ investing is highly volatile and subject to changing economic conditions and the vagaries of speculators among other risks.  Further, diversification and strategic or tactical allocation do not assure profit or protect against loss in declining markets. Index performance returns do not reflect any management fees, transaction costs or expenses.  One cannot invest directly in an index.  Past performance does not guarantee future results.

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