Happy Independence Day!
Star Wars. May the Force be with you! Since November 2012, the market has provided very nice investment returns for investors. Improving economic conditions measured by unemployment and housing data over the past six months is contributing to more normal market conditions. Many leading strategists blame or credit the QE III for the rise in the stock market. More recent Federal Reserve pronouncements in the annual Humphrey Hawkins testimony before Congress served as a warning that the Fed would “taper” Open Market Operations late in the year should economic conditions improve. Current interest rate structures continue to forecast growth and not recession.
Jaws. Just when you thought it was safe to go back into the water….For the long term investor, the near 125% rise in the Dow Jones Industrial Average since March of 2009 has been rewarding. Recent data suggests the retail investor has not enjoyed these returns. Major advertising campaigns have been designed to entice retail back into the market. Yet, we believe the market needs a rest. At 15,500, the market was pricing perfection that earnings and revenues were rising together. We believe the Wall of Worry has many pitfalls that will plague the perfection. Syria appears to be falling before our eyes. Civil unrest continues to dominate Turkey and Greece. Peace is not breaking out in Iraq nor Afghanistan. We believe that a 10% decline in stock prices would provide a healthy window for new investors into the market.
Back to the Future. Great Scott! Marty. The ample monetary reserves the Federal Reserve has manufactured through the $85 billion monthly purchases eventually will lead to higher money supply growth. At this juncture, money supply is growing at a nominal pace. We believe the money supply will grow closer to 8 to 10% over the next twelve months which should energize stocks. The more interesting twist this quarter was that Chairman Bernanke’s services are no longer needed by the Administration. Appointing new Federal Reserve Chairmans have historically caused unrest on Wall Street. In 1987, when Alan Greenspan took over the Fed, we had tremendous market volatility but somehow got through it with very little damage.
Jurassic Park. The fixed income market is very large. According to www.learnbonds.com, the U.S. Treasury has roughly $16.5 trillion in outstanding bonds. The overall bond market approaches $40 trillion in size. At the end of 2012, the U.S. stock market was approximately $19 trillion. If there is a true bear market in bonds, the values of outstanding bonds will drop as interest rates rise. In the late 1970’s when interest rates rose, the bond market died a slow death culminating in October, 1979 when Paul Volker spiked short-term rates to 21% six weeks after taking office. We believe that significant inflationary pressures must occur in order for rates to rise.
Raiders of the Lost Ark. I hate snakes! We remain very positive about stocks. Although, we believe that small and mid-capitalization stocks will offer better returns if we have rampant monetary growth and ultimate inflation. During the late 1970’s small capitalization stocks provided better returns than large capitalization stocks. Also, price earnings ratios declined and yields rose as interest rates rose. Albeit, we incurred double digit inflation rates for three years that ended when Volker spiked Federal Fund rates.
The Empire Strikes Back. Hope the Force is still with you! The World Stock markets have risen significantly over the past twelve months with high double digit returns for most. Interestingly, China, Russia and Brazil are the three major stock indices which are negative for the same time period. The dark shadow of Communism and Socialism still conflicts free market capitalism. These markets have their capitalist doors partially open with constraints on outsiders from making significant forays into these markets.
The Dark Night (Batman). The recent correction in most commodity prices suggests that supply exceeds demand for many industrial commodities. Recent Federal Reserve minutes suggest that a target of 2% inflation is more desirable than price deflation. Any worldwide slow-down would create some supply gluts softening prices. Gold actually has dropped in value as the Future Exchages have raised margin requirements for Gold contracts. Gold will stabilize once industrial commodity prices reflect higher demand.
Alien. Sigourney Weaver. News from the housing market continues to provide positive tones to the overall economy. Recent data suggests that overall prices for housing has risen from bottoms reached two years ago. Housing starts remain below one million on an annual basis. Unemployment rates have evened out over the past six months stuck at 7.6%. We believe housing should improve with an improving unemployment picture.
Ghost Busters. Who are you going to call? We believe the stock market continues to be the best investment market for long term returns. Patience will always be rewarded. New investors who want to make new commitments to the market should target monthly commitments to the market and avoid timing the market. With the sheer amount of money in money markets and bond funds, we believe the stock market will go much higher punching through the recent market highs.
Pirates of the Caribbean. Arggh. We remain committed to long-term investing versus excessive trading. Buy and hold has worked very well over the past ten years. We believe it will work well for the next ten years. We appreciate the opportunity to serve as your investment advisor.
The top ten summer time movies of all time was taken from www.denofgeek.us.
Robinson Investment Group
5301 Virginia Way, Suite 150
Brentwood, Tennessee 37027