For dentists and others watching the investment markets, the first half of 2012 was a
strange and somewhat harrowing experience. The first four months of
the year saw American stocks zoom upward by almost 10 percentage
points, building on one of the best January performances in history.
Then came May, when the
Wilshire 5000–the
broadest index of U.S. stocks–gave back 6.22% of its value. June was a
muddle–until the final day of the month, when The Wilshire 5000 gained
back 2.53% in a single trading day and essentially saved the quarter
from being considered a total disaster. On the same day, the S&P
500 gained 2.49% and the Nasdaq exchange was up 3.00%.
If there is a lesson here–and the markets are always teaching us new
ones–it is that the drops, and the rises, take us by surprise, and are
almost impossible to predict.
Let’s take stock of the past quarter, and look at where we are after
the first half of 2012. Overall, the Wilshire 5000 fell 3.13% for the
second quarter, but it’s still up 9.22% for the year. The comparable
Russell 3000 index fell 3.15% during the second quarter, but rose 3.92% in June, and is up 9.32% for the year.
The other stock market sectors moved in a very similar pattern.
Large cap stocks, represented by the Wilshire U.S. Large Cap index,
fell 3.11% for the quarter, but are posting a 9.15% overall gain in the
first half of 2012. The Russell 1000 large-cap index fell 3.12% for
the second quarter, but is up 9.38% for the first half of the year.
The widely-quoted S&P 500 lost 3.29% in the same time period, but
is up 8.31% this year.
The Wilshire U.S. Mid-Cap index was the biggest quarterly loser,
down 5.71% in the second three months of the year, but it, too, has
posted an overall gain so far this year, at 5.93%. The
Russell midcap index dropped 4.40% in the recent quarter, but is up 7.97% so far this year.
The Wilshire U.S.
Small-Cap
index dropped 3.33% in the three months ending June 30, but ended the
first half up 9.54%. The Russell 2000 small-cap index lost 3.47% in
the three months ending January 30, but is up 8.53% for the first six
months of 2012. The technology-heavy
Nasdaq Composite Index lost 5.06% in the second quarter, but was up 3.81% in June, and has a 12.66% gain for the year.
Although energy stocks are down 3.37% for the year, as a result of
falling oil prices, other sectors are posting significant gains.
Telecommunication services stocks are up 13.34% for the year, while
information technology stocks have posted a 12.71% gain, even though
they fell 6.96% during the second quarter. Financial stocks are up
12.63% and Consumer Discretionary stocks have gained 12.06%.
Internationally, the broad-based EAFE index of developed economies
fell 8.37% for the quarter despite a 6.79% gain in the past month. For
the year, the index is up a scant 0.77%. Not surprisingly, the weakest
component is EAFE’s Europe index, down 9.11% for the second quarter,
down 0.12% so far this year.
The EAFE Emerging Markets index of lesser-developed economies fell
10.00% in the second quarter, but is up 2.29% for the year. The
bloodiest quarter was experienced by the Eastern European EM countries,
down 15.03% in the three months ending June 30, but still up 0.38% for
the year.
Commodities are generally down for the year, with the
S and P GSCI
index falling 12.38% in the second quarter, down 7.23% so far this
year. The hardest-hit: energy (mostly oil) down 17.05% for the
quarter, down 10.98% so far in 2012.
On the bond side,
U.S. Treasuries
remained at rock-bottom yields. The 12-month T-Bond yields just
0.20%. Locking up your money for three years gets you 0.39% a year.
Ten-year issues yield 1.64%, and 30-year Treasuries bring a 2.75%
annual coupon yield. Muni bonds are even lower, with yields of 0.211%
(1-year), 0.343% (2-year), 0.808% (5-year) and 1.922% (10-year), while
the aggregate of all AAA corporate bonds is yielding 1.14% for bonds
with a five-year maturity.
It is worth looking at what led to the sudden jump in investor
enthusiasm for stocks on the very last day of the quarter, and see
whether we should be feeling the same exuberance as the general
public. The market jumped on preliminary news that a late night round
of negotiations among the Eurozone leaders had led to a “breakthrough”
(as the news reports called it).
Over the weekend following these news
reports, we have learned more details: the European leaders have
decided that instead of lending more money to the Spanish government,
and possibly eroding its already shaky creditor status, they will
inject bailout funds directly into Spanish banks. In addition, the
leaders agreed to use the bailout funds set aside in the
European Financial Stability Facility and the
European Central Bank
“in a more flexible manner” in order to stabilize the Eurozone
markets. Finally, the leaders announced plans to create a 120 billion
euro fund to stimulate growth across Europe and create jobs.
All of these moves represent at least a quarter-degree turn from
previous policies. Giving money directly to the Spanish banking system
avoids a negative feedback loop where lending to the government simply
burdens it with more debt and causes investors to demand cripplingly
high interest rates on Spanish government bonds.
Making the bailout
funds more flexible seems to be a concession by German government
leaders, who wanted any bailouts to be accompanied by austerity
measures in the receiving country, which has, so far, weakened every
economy that agreed to it. The growth funds seem to be a step in the
same direction, away from austerity toward promoting growth and
employment–which avoids the negative feedback loop of austerity causing
economic hardship, leading to declines in GDP, leading to lower tax
revenues, leading to deeper fiscal deficits, which is what the bailouts
were intended to alleviate.
However, as dentists and other investors read the fine print, they will notice that the
newly-flexible bailout funds amount to about 500 billion euros,
compared with roughly $2 trillion in potentially distressed government
debt. It is possible that some of the enthusiasm generated on the last
day of the first quarter will have evaporated within the week,
following a well-worn path of enthusiasm followed by panic that
investors who are paying attention will have already grown tired of.
Meanwhile, there is some cause for concern in the U.S. economy,
which has recently seen the kind of good news that should be put into
better perspective. The number of Americans filing for first-time
unemployment benefits fell to 386,000 for the week ending June 23, down
from 392,000 the previous week.
But the four-week average fell by just
750, meaning that if you look past the headlines, an economist would
have trouble discerning a trend in the data. Similarly, home prices in
the 20 largest U.S. cities rose 1.3% in value in April, based on the
S&P/Case-Shiller Home Price indices. But this, too, calls for some perspective: the rise only brings home prices to levels seen in early 2003.
Is there a pattern here? Investors have been led to believe that
the global situation, and the U.S. economic trends, were worse than an
objective view might indicate, and then, in one day, they were suddenly
seeing unexpected positive news that may have been overhyped.
The
truth is that Europe is still working its way out of a crisis, and many
analysts are still predicting a recession in the Eurozone this year.
The U.S. has been on a slow recovery path, and it is not easy to
predict its progress beyond feeling grateful that the situation is not
as dire as we see in Greece, or as unsettling as what we’re seeing in
Spain.
The most truthful thing one can say is that these sharp turns in the
market–in May, on the last day of June–are not driven by any change in
the intrinsic value of stocks, or any interruption in the actions of
millions of workers who are daily building stronger, more profitable
franchises throughout the global economy. The lurches of the roller
coaster represent emotional responses by skittish investors who want to
jump into or out of the markets based on headlines that usually seem to
overstate the case on the upside and the downside.
So far, 2012 has been a very bumpy ride, and has certainly been
scary at times. But from a real investor’s point of view - whether dentist or not - behind all
the sturm and drang, the first half of the year has seen unusually
positive growth in the markets. We cannot predict what the second half
will bring, any more than we can predict what the weather will be at a
certain date in October or December.
Dentists should remain steadily invested and
pay as little attention as possible to the shrill voices of our
increasingly frantic news outlets has been a solid strategy so far this
year, and has generally worked out well for investors over time.
2012′s second half will undoubtedly bring us more surprises. It
will force us to remember that we are not investing in current events,
but in the far more boring, far more significant daily work and effort
of the people who get up each morning and contribute to the growth of
our global economy and the growth of the businesses they work for–the
companies that we, together, are invested in.
Original Financial Advisor's Article Posted here.
