Moving On Up? Inflation and Your Weekly Update

Headlines are screaming, “Markets Hit New Highs.” We thought we’d better chime in. If only in self-defense!

While we acknowledge the new high (and are certainly grateful for it), this week’s Update takes an in-depth view at what we think is really important — investor behavior.

Enjoy!

Best always,
Lee and Jeremy


This Week’s Quote:

“Investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”
― Jason Zweig


JL Davis Thoughts This Week:

At this writing, the S&P 500 stock index had broken through for yet another all-time high. Of course, we’re certainly pleased for the sake of our clients who invest. But we’re not terribly surprised. After all, according to the Wall Street Journal, it’s the 12th record high so far this year.

We’ve heard a number of pundits proffer theories on the rise in equities, including:

• It’s just the Federal Reserve printing money; the market’s doomed to retreat.
• It’s only the beginning of a sustained new Bull Market…technology and productivity gains will continually drive it higher.
• A “correction” is overdue and only awaits a triggering moment.

At J. L. Davis, we believe almost all prognostication about the future of stocks is pure folly. We have noticed, however, over a very long period that the stock prices do well when company earnings are doing well. Stocks seem to do even better when company earnings are accelerating as they have been routinely the last 5 years.

But rather than focus on the stock market’s new highs, which can be neither correctly predicted nor controlled, we focus (and urge clients to do the same) on what can be controlled. Behavior.

Recently, the 2014 release of Dalbar’s Quantitative Analysis of Investor Behavior (“QAIB”—what a name!) noted that the average investor in a blend of equities and fixed income mutual funds achieved only a 2.6% net annualized rate of return for the 10-year time period ending December 31, 2013. That same “average” investor did modestly worse over the last 20 years with a mere 2.5% return, and still worse, a 30-year annualized rate of a paltry 1.9%. The report also noted that the so-called “bond investor,” investing in just fixed income funds did even worse with an annualized return of 0.6% over 10 years, 0.7% over 20 years, and 0.7% over 30 years. Ouch.

What defines the “average investor?” The report has a convoluted definition: “the universe of all mutual fund investors whose actions and financial results are restated to represent a single investor.” In other words, large, small, professional and non-professional investors… virtually everyone.

Further, Dalbar’s report theorizes that investors make poor investment choices, often driven by emotion, that damage their returns. They almost surely want to be rational and unemotional. Yet when fear and greed combine with a herd instinct, irrational investment decisions aren’t far behind.

Greed was demonstrated in March 2000, which saw the largest purchase of mutual funds in the history of the stock market. Just before the tech bubble. In 2008-9, fear caused many to sell their stock holdings near the bottom. Many fearful investors stayed in cash for the same reason, missing one of the greatest market runs in history that began in March 2009 and carries on today.

Our view is that controlling behavior can help avoid the fate of “average” investors. Having a plan and sticking to it, regardless. Continuing to invest when times are seemingly at their worst. And when liquidity is needed for income or opportunity, selling sparingly, primarily when markets are nicely up (like today, perhaps). In short staying emotionally detached. Which we believe is best done with professional assistance!

That’s our view. What’s yours?**
Lee & Jeremy

http://online.wsj.com/news/articles/SB10001424052702303403604579587750901936202?mg=reno64-wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424052702303403604579587750901936202.html

http://www.dalbar.com/Portals/dalbar/cache/News/PressReleases/2014QAIBHighlightsPR.pdf

http://www.forbes.com/sites/rickferri/2014/01/09/portfolio-solutions-30-year-market-forecast/



Market Week: May 27, 2014

The Markets

After spending weeks bouncing around just under 1,900, the S&P 500 finally managed to top it on Friday, setting a new record closing high in the process. And after a lot of back and forth at the beginning of the week, the Nasdaq and the Russell 2000 small caps rebounded strongly from their travails of recent weeks, though the small caps are still down for the year.

Last Week's Headlines

• Discussion among members of the Federal Reserve's monetary policy committee has begun to turn to how best to manage the impact of the end of supportive economic measures, whenever that seems appropriate. According to minutes of the committee's most recent meeting, the state of the labor market was a major point of debate and will continue to play a major role in Fed policy.
• As more homeowners put their houses on the market in April, sales of existing homes rose 1.3% over the course of the month. It was the first monthly increase this year, but the National Association of Realtors® said that still left home resales 6.8% lower than the previous April.
• New home sales also jumped in April; the Commerce Department said they were up 6.4% for the month, though that was 4.2% below April 2013.
• Parties campaigning on anti-European Union themes gained ground in the EU's parliamentary elections over the weekend. However, a majority of seats are still held by mainstream parties, so financial assistance programs for weaker members shouldn't see any immediate disruption.
• Credit Suisse agreed to pay $2.5 billion to settle federal charges that for decades it had helped Americans avoid taxes by concealing assets in undeclared bank accounts. The Swiss bank also pleaded guilty to a criminal charge of conspiracy.
• China's manufacturing sector was on the brink of expansion in May, according to the Markit Purchasing Managers Index. The reading on the monthly survey hit a four-month high of 49.7% (a reading of 50% indicates expansion). China also gave Russia some relief from Western economic sanctions by signing a $400 billion agreement to purchase gas from Russia's leading supplier.
• A Pennsylvania federal grand jury charged five members of a Chinese military unit with stealing industrial secrets by hacking computers at six U.S. enterprises in the nuclear, solar, and metals industries. The indictment is said to be the first involving a governmental body rather than an individual corporation.

Key Dates/Data Releases
5/27: Durable goods orders, home prices
5/29: Revised estimate of Q1
GDP
5/30: Personal income/spending

Eye on the Week Ahead

During the holiday-shortened week, investors will assess the results of the EU elections. They also will get a second look at Q1 economic growth and a smattering of manufacturing, housing, and consumer data.

Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell
2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

Prepared by Lee Davis** and Broadridge Investor Communication Solutions, Inc. Copyright 2014