People are feeling black and blue, beaten up and ready for some good times.
I could be talking about Centre County but I’m really thinking the stock markets. In 2011, the S & P 500, which is an index of 500 common U.S. stocks, was incredibly volatile. Yet, for the whole year the S & P returned a fantastic zero percent.
There was a lot of bad news in 2011. Greece and other heavily indebted Eurozone members hovered under threat of bankruptcy (and some still do). This earned them the nickname, PIIGS, for Portugal, Italy, Ireland, Greece and Spain. The Eurozone is also called the Euro Area and consists of 17 European members sharing the same common currency. As of Jan. 27, 2012, credit ratings were lowered for five members of the Eurozone: Italy, Spain, Belgium, Cyprus and Slovenia.
Not to be outdone, on Aug. 5, 2011, Standard & Poor’s (a credit rating agency) downgraded the United States’ credit rating to one notch below AAA for the first time in U.S. history. Until August, the US had carried the highest ratings since Moody’s assigned it Triple A in 1917. Our country was also placed on “CreditWatch with negative implications” due to the fact that our administration could not come up with “a credible plan” to reduce our long-term debt problem.
Occupy Wall Street and many articles centered on the rising wealth for the top 1 percent and the hurting middle class. The health of a country can be linked to the income disparity among its population and America’s income inequality is rising. We’re not alone; the world is trending in the same direction. The World Institute for Development Economics Research at United Nations University reports that the richest 1 percent of adults alone owned 40 percent of global assets. This trend tends to perpetuate due to the wealthy providing opportunities and better education to their offspring.
In short, I say we need some good news.
Let’s start with January. There is an old market adage that says, “As goes January, so goes the year.” In the first month of 2012, the S & P 500 returned a positive 4.67 percent. How significant is this upturn? The “January Barometer” created by the Stock Trader’s Almanac in 1972 states that as the S & P 500 goes in January, so goes the year. In 61 years (since 1950), the indicator has an accuracy of 88.5 percent. Only seven times has the market not followed January’s lead.
The Federal Reserve has promised low interest rates out to 2014. The added transparency from the Fed helps with planning and knowing whether investors need to be concerned about interest rate sensitive assets. They also have a target inflation rate of 2% each year. The low interest rate environment is also helping people lower mortgage payments and continue to pay down their debt. On Feb. 2, 2012, the 30-year fixed mortgage rate fell to 3.87 percent.
Lower interest rates do have a downside, that affects safe investments, like Certificates of Deposit (CDs), savings accounts and Money Markets. These are earning next to nothing. On the upside (we’re focusing on the positive, remember?) this means that to find yield, many investors are turning to good old-fashioned dividends. Even though the S & P may have returned nothing in 2011, the blue chip, dividend-paying-heavy Dow Jones Industrial Average returned 5.53 percent for the year. With rates remaining low on other assets, the trend may continue for a while.
More positive news was released Feb. 3, with the U.S. unemployment report. The jobless rate dropped to the lowest rate in three years. Employers added 243,000 jobs in Jan. 2012 which was much stronger than economists expected. This is a long way from the additional 6 million jobs needed to get back to 2008 employment, but at least we are moving in the right direction.
The equity markets also have the strength of strong balance sheets and good earnings. Companies have historically low debt levels and high cash levels. These are all things that can drive growth in the economy and lead to investors buying good quality stocks.
Overall, the markets and the economy are showing signs of life. It may be time to take advantage of the upturn and take some cash off the sidelines.
Always remember: No matter how good the good news is, it pays to pay attention.
