The biggest financial news of the summer happened this past week when for the first time in history the S&P 500 closed above the 2000 mark! This represents a year-to-date increase of slightly over 8% and a surprisingly strong return of 22% for the past twelve months. With less than three weeks remaining in the summer of 2014, it appears very unlikely that we will experience the often discussed and predicted summer meltdown of the financial markets. Once again the “Sell in May and Go Away” proponents would have had encouraged investors into missing a very robust three months of summer time stock market performance. In fact the performance of the S&P 500 for the precise period of May 1st through August 29th has been just under 4%. Based on this short term analysis we might even hear next summer that it is time to “Buy in May and Stock it Away”.
So, let’s take a brief walk down Wall Street to see how the financial markets have been behaving for the past few years. A great place to start this walk is at the lowest point of the dramatic financial system and economic meltdown of 2008/2009. This low point in consumer & economic sentiment took place on March 9th, 2009. To what extent the financial markets have “recovered” can easily be calculated by examining the financial market’s performance of America’s largest 500 companies, as measured by the Standard & Poor’s 500 stock index (the S&P 500).
Just over five years ago, as recorded on March 9, 2009, the major market’s indexes technically “bottomed out”. From a numerical measurement, they reached their respective levels of 677 for the S&P 500 Index, while the other widely followed market index, the Dow Jones Industrial Average (DJIA), reached the low level of 6,507. Last week’s record high on the S&P 500 Index (since March 9th, 2009) represents a point increase of 1,326 which subsequently equates to a cumulative return off the low point of 196 % . The corresponding change in value for the Dow Jones Industrial Average Index through July 28th is an increase of 10,646 points and a cumulative return of 164%.
So what does this all mean to us as investors? It demonstrates that when we are investing it is difficult to call the length and severity of “bear” markets, and that ultimately when investing we need to remember that time is our friend. In retrospect we can measure the negative impact to our financial success if we had pulled our investment funds out of the markets on March 9, 2009 and simply invested in cash. Not only would we have missed the recovery but we would have also lost a portion of the relative value as measured against the annual inflation rates of approximately 2%. What this brief walk down Wall Street is demonstrating to us is that we need to be careful about trying to time the markets. Essentially, we must stay committed to a long term investment strategy and that we must be “in the markets if we want to have a winning strategy”.
Speaking of winning, of the 495 companies reporting second quarter earnings, 366 or about 74% of the companies beat their earnings estimates. Earnings “beats” are a key element to driving the markets higher and help to drive investor expectations about the future economic expectations. Politics, international turmoil and inflation will further impact the existing and short term pricing of the financial markets. Inflation is showing continued signs of a very moderate 2% year over year change and gasoline prices have fallen nearly 15 cents during the last month. Geopolitical concerns over Russia, the Gaza Strip and Airline disasters seemed to have had little impact on the world’s oil flows and therefore have the investment guru’s generally unconcerned. The best news for the markets right now, and for the rest of the summer, is an environment of no surprises. Fortunately, there seems to be little in the way of economic news that is surprising. As such we continue to see a positive, and moderately slow, economic recovery for the remainder of this summer and the balance of 2014.
This all stated, we must realize that the key to investment success as measured by the financial yardsticks of the S&P 500 index and the DJIA index is a long term investment strategy. Now that summer is almost over, it is a good time to examine our current investment strategy and asset allocation to ensure a properly positioned portfolio for the rest of 2014 and the long investment road beyond.
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