The stock market’s strong performance in March
continued through the Second Quarter. Stocks
reached new highs every week up until mid-June
when the market stumbled slightly. Since the lows
reached on March 9th, the S&P 500 has rebounded
36%. On a year-to-date basis, the gains are much
lower. The large cap stocks in the S&P 500
gained 3.3% but the DJIA lost 2%. Small stocks
in the Russell 2000 Index posted gains of 2.6%,
while international stocks in the DJ World (ex US)
Index faired much better with gains of 11.3%.
Although most stock indices are positive for the
year, not all stocks have performed uniformly. For
instance, growth stocks are significantly outperforming
value stocks. Large and small cap growth
stocks have gained about 11%-12% year-to-date
while large and small cap value stocks lost 3%-
4%. Midcap stocks have outperformed large and
small cap stocks both by about 5% in each category
of value, blend and growth. Looking at
performance by industry, technology is the winner
followed by materials and consumer discretionary
stocks with gains of 25%, 15% and 8% respectively.
The losers have been Industrials, Financials
and Telecom with losses of -6%, -4% and -4%
respectively. (Data as of Friday, June 26.)
With the stock market higher, consumer confidence
has also been rising. Economic numbers
have been coming in better than previous quarters
giving support to many economists claims that the
worst is over. Many are predicting an end to the recession by the close of the year.
Although the news has been better, it is still not
good news. Following –6.1% GDP growth during
the Fourth Quarter, First Quarter GDP growth has
been estimated at –5.5%. Economists’ forecasts of
the recession ending is largely due to stimulus
spending. When the stimulus is withdrawn, there is
concern that the economy may not continue to grow.
There is also great concern that the cost of the
stimulus and the significant costs of new programs
being proposed by government is creating a debt
burden too high to be solved without significantly
higher taxes and/or inflation which can each squelch
economic growth.
New jobless claims have been decreasing, but
unemployment continues to climb and is expected to
reach 10%. Unemployment rises much faster than it
declines. Many of the jobs lost, especially in the
auto industry, will not come back even when the
economy recovers. Consumers have been postponing
large purchases and eliminating many discretionary
purchases and may continue to do so until the
employment picture improves and people feel more
secure about their jobs and income.
Treasury bonds are now yielding 3.5% (up from
2.7% at the end of March), and money markets are
still yielding near 0%. With yields on “safe”
investments so low and the recent positive events in
the economy and stock market, some money has
flowed back into stock investments in search of
higher returns. However, it is not near the amount
that went out. If the news continues to be less bad
and more of the large cash balances get invested in
stocks, stocks could be provided the momentum they
need to continue moving upward. Markets may
continue to be volatile but we also might have a
better opportunity to reduce stock exposure for those
who want to be more conservative.
In our newsletter last quarter, we discussed how
people were revising their plans for retirement.
Some may have lost jobs or at least seen their job
security decline. Many had seen their home values
fall along with their retirement plan balances and
savings that were also invested in the stock market.
Others were depleting the savings they did have by helping their grown children or elderly parents who
had financial hardships. These factors caused many
people, but especially baby boomers, to reevaluate
when they planned to retire and how much they
planned to spend in retirement.
With the stock market now up 36% from its lows
and economists believing the recession is ending, it
may be easy for some people to stop worrying
about their retirement and believe that everything
will work out on its own. This would be a mistake.
Accumulating enough for retirement is going to be
more difficult and require hard work and discipline.
The stock market is still down 41% from its highs.
It could be several years before the stock market
reaches the previous high, and we may see the stock
market go back down again first. Some people may
have stopped making 401k contributions. To make
matters worse, 23% of employers eliminated their
401k matching contribution and 35% plan to make
the change permanent. (Source: CFO Research and
Watson Wyatt Studies.) With profits down, profit
sharing contributions are also lower than past years.
If you stopped contributing to your 401k, you
should probably start contributing again so you
don’t fall further behind in saving enough for
retirement. If stocks no longer return the long-term
average of 10%, you may need to save even more—
especially if your employer is no longer making
contributions. You possibly will need to save
outside your retirement plan, too, as well as make
changes to your asset allocation.
If you would like to have an in-depth retirement
planning review, please contact your advisor. We
are here to help you understand your situation and
choices so that you can make informed decisions.
During this recession, many companies have seen their
financial position weaken. We want to assure you
that although the decline in the stock market has a
direct effect on our revenues, Cambridge Advisors is
financially sound and growing, and we plan to be in
business for many years to come. We are committed
to providing a high level of service to our clients, and
therefore have no plans to reduce our service
offerings, increase our fees, or reduce our staff as
others in the financial industry have done.
We have been adding new clients during this period
and would like to add more. Studies show that 84% of
people want to be introduced to an advisor by
someone they know. You may have family or friends
who need our services now more than ever and would
like an introduction to Cambridge Advisors. Perhaps
they have been laid off and have a retirement plan they
need to rollover into an IRA. Or, they may be nearing
retirement age but need help planning since the stock
market decline has negatively impacted their savings.
Another possibility is that they are looking for a
relationship with an advisor who they can trust that
will focus on developing a long-term investment plan
based on sound principles to help them reach their
financial goals. Our Discovery Questionnaire is a
quick and easy way for the people you care about to
determine if they would like to learn more about our
approach and services. Please let us know if you
would like a copy to share with someone you think
would benefit from a relationship with Cambridge
Advisors.
Question: What stock sectors have performed the
best in the first year of a bull market?
Answer: During the beginning stages of the last 8
bull markets from 1960 to 2008, the Consumer
Discretionary sector has been a leader 8 times, and
the Financial Sector has been a leader 6 times.
Small cap stocks have outperformed large cap
stocks 7 times. (Source: Haver Analytics, FMRCo
(MARE) as of 12/31/08) This time could be
different as consumers are saving more rather than
spending on discretionary items and the financial
industry still has many issues to overcome. In
addition, smaller companies are viewed as higher
risk and may have more difficulty getting the
financing they need.
(c) Cambridge Advisors Inc.
www.cambridgeadvisors.net |
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