Markets rally and investors are not participating

By David B. Armstrong, CFA | Oct 18, 2010 | Weekly Market Commentary

Be sure to check out the Monument Wealth Management weekly column on U.S. News and World Report. Last Friday’s column titled “Make Your Retirement a Piece of Cake” can read the column here.

While stocks were higher last week, it seems as though the individual investor is not participating the way we would expect.  The equity markets are up 10% in the past three months, but inflows of new cash from individual investors into equity investments is still negative since the “flash crash.”

The equity markets saw a boost last week as positive earnings reports from tech companies helped offset a selloff in financial stocks.   Additionally, the expectation that more stimulus in the form of QE2 helped economically sensitive sectors like industrials gain on the week as well.

The Dow Jones Industrial Average (DJIA) finished the week above 11,000 again by gaining 0.51% to finish the week at 11,063, the S&P 500 Index gained 0.95% to finish at 1,176 and the Nasdaq Composite Index gained 2.78% to finish at 2,469.  The Russell 2000, which measures smaller capitalization stocks, gained 1.35% to finish at 703.16.

It looks like individual investors are still not buying the equity market rally.  According to LPL Financial Research, $53 billion has come out of retail equity investments since May 6th, 2010 and has not found its way back in.  In the past 25 years, each 3 month move of 10% or greater has been accompanied by investors putting their cash to work in retail equity investments. This is the first time that has not happened.  As we stated in a prior weekly report, we think that the stock market could actually become the stimulus that everyone is looking for.  When the market increases, so does confidence in both corporate America as well as in the investing public.  We think that while the individual investor is gun-shy about putting their money to work right now, they will begin to gain more confidence as markets continue to recover. Let’s look at some number to support the idea of a rally providing stimulus:

1)     The S&P 500 is up about +15% in the past 4 months;

2)     Mortgage rates have declined by almost 0.50% in the past quarter (helps housing market);

3)     Junk bond prices have increased (shows an appetite for risk);

4)     The dollar has declined (US goods are a better deal to overseas investors).

Finally, the topic of investing in the commodity asset class is on everyone’s mind.  Our advice – don’t be foolish.  Precious metal such as gold is only worth what someone else is willing to pay for it.  Period.  It has no cash flow and produces no earnings.  Barron’s had a great piece on gold from the previous weekend.  The article stated that the metals consulting firm, CPM Group, reports the value of gold for use in industry and jewelry is only about $600.  So with gold trading around $1340, that’s a lot of froth built in.

Here’s a list of assets over history that were only worth what people are willing to pay for them, had no earnings and no cash flow – tulips in the 1600’s, Florida land in the 1920’s, gold in the 1980’s, dot.com stocks in the 1990’s and most recently, houses.  Now it’s gold.  If you are going to gain exposure to the asset class,, stop and look at the chart of the price of gold and compare it to charts of the assets mentioned above.  Please take note of what happens to prices after they go parabolic; it’s not as pretty as gold or tulips.

Just be careful…have a plan, stick to it and be smart.  Call us for help or if you have any questions.

Securities and Financial Planning offered through LPL Financial, a Registered Investment Advisor.  Member FINRA/SIPC

**Standard Compliance Disclosures
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.  All performance referenced is historical and is no guarantee of future results.  All indices are unmanaged and cannot be invested into directly.  Stock investing involves risk including loss of principal.  The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries, and widely held by individuals and institutional investors. The Standard & Poor’s 500 Stock Index (S&P 500) is an unmanaged capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The NASDAQ Composite Index measures all domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index. The Russell 2000 Small Stock Index is an unmanaged index generally representative of the 2000 smallest companies in the Russell 3000 Index.  The Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. Precious metal investing is subject to substantial fluctuation and potential for loss. The fast price swings of commodities will result in significant volatility in an investor’s holdings.