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Don't be Fooled by The January Barometer

 

I'm sure I don’t have to tell you that it’s been a surprising start to the year.  With just three weeks of trading under our belts, many major stock markets around the globe have entered correction (a decline of greater than 10%) or bear (a decline of greater than 20%) territory.  Markets like the US, UK and Germany are in correction territory while China, Hong Kong, and Brazil are in bear territory.  Not exactly what we were all hoping for after back-to-back sluggish years of investing in global markets. 

So what does this drop mean for the rest of 2016?  If one gets there financial insights from CNBC you might be convinced that as January goes, so goes the year.  Listening to CNBC earlier this week, the news reporters kept referring to something called the January Barometer. They reported that during the past 35 years, the S&P 500 followed January’s direction 25 times, or 71 percent of the time. 
 
It’s funny how this type of information can mislead investors into thinking January should give them information about the future direction of markets.  To the untrained eye, 71 percent is a high number, and suggests really good odds.  To the skeptic, there’s more than meets the eye.
 

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Benchmarks, Divergency and Volatility Impact

 

One of the most surprising facts about the DJIA is that, though it’s often considered a benchmark for the entire US Stock Market, the index contains only 30 companies.  It’s just a sliver of the entire global stock market.  The S&P 500, as you may already know, contains 500 companies so it’s a bit bigger than the DJIA.  But both the S&P 500 and the DJIA are poor benchmarks for a diversified portfolio of stocks because those two indices focus solely on large U.S. companies.  Neither comes close to representing the performance of the 19,000 publicly traded stocks in the U.S. (4,000 companies on the NYSE and NASDAQ…plus an additional 15,000 stocks traded over the counter).  

Nor do these two indices represent stocks trading outside the U.S.   Approximately 75% of the world’s publicly traded companies are now found outside the U.S.  Both the DJIA and the S&P 500 are just a fraction of the total global stock market which you may be surprised to find out contains more than 100,000 publicly traded stocks. 

Measuring stock market performance based on the movements of the Dow Jones Industrial Average (DJIA) or S&P 500 is analogous to measuring the performance of an entire super market based on how well the meat department is doing. 

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Timely and Trusted Forecasts!??

Written by Jerrold "Lex" Grecu, CFA, CFP(r) on 05 March 2014.

2013 was the best year for the S&P 500 Index since 1997, with a total return in excess of 32%.  This unusually strong performance for US stocks was a welcome surprise for investors who follow a disciplined buy-and-hold strategy but a source of exasperation for many investors who trust in the advice and business forecasts of large financial publications such as Kiplinger Magazine.  Kiplinger's slogan/tagline is "Timely, Trusted Personal Finance Advice and Business Forecasts."  Sounds awesome!  Not only are they giving us the forecasts we surely need to navigate the complex financial markets but they are giving us these forecasts right when we need them most.    Who could ask for anything more?!  Obviously, I'm being sarcastic but this is no laughing matter for the hundreds of thousands of investors who actually read Kiplinger Magazine and believe they are a trusted source simply because they claim to be.

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Happy 2014!??

Written by Jerrold "Lex" Grecu, CFA, CFP(r) on 03 February 2014.

January was a rough month for stocks and today saw another sharp decline on Wall Street.  Some have concerns about whether the recent selloff is the start of a long-feared correction.  I suspect that this recent downturn will not turn into a true correction.  I simply don’t see the market facing as many hurdles as some people think and we’re probably going to see a bottom to this mini-correction in the weeks ahead.

  1. The U.S. Economy is growing.  The U.S. economy has some great momentum and last week’s release of the government’s GDP report, which showed the economy grew by 3.2 percent in the fourth quarter of 2013, was in line with expectations.   If we continue to see good numbers in the U.S., the market will forget about emerging markets which were the impetus to this recent pullback.  We’ve seen emerging markets suffer in the early to mid-90’s and that was an amazing bull market in the U.S.  One can’t claim that “as emerging markets go, so goes the world.” 
  2. U.S. Stock market valuations look reasonable.  At a current PE ratio of roughly 17, the S&P 500 is valued near its historical average.  Stocks neither appear cheap nor expensive at this point.
  3. There are a lot of buyers on the sidelines that missed last year’s big rally.  They are kicking themselves and still waiting for an entry point to get back in.  If the market stays down and shows some sign of bottoming, many of these new buyers could be coming into the markets to provide support. 
  4. Bond yields are very low so there isn't a compelling alternative to stocks at this moment in time.
  5. Investor optimism is still pretty low.  Typically, major corrections are setup by investor over-confidence and, in the words of Nobel Laureate Robert Shiller, “irrational exuberance.”  We’re not seeing the sort of excesses that come with irrational exuberance.  
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Barron's Cover - A Different Dimension

Written by Jerrold "Lex" Grecu, CFA, CFP(r) on 08 January 2014.

Dimensional Fund Advisors (DFA) is getting a lot of attention these days!  This week's issue of Barron's has DFA on the cover and states "Using an investment strategy built around the pioneering work of Nobel Prize-winning economist Eugene Fama, Dimensional Fund Advisors has delivered astounding results."  We would have included the article but you need a subscription to Barron's to access it.

At Grecu Capital Management, Inc. we're proud to say that we weren't late to the party.  We've held the majority of our client assets in DFA funds for almost a decade.  Back in 2002, when I founded Grecu Capital Management, DFA managed $36 billion in assets.  Today, just 12 years later, they manage over $300 Billion.  This amazing growth came during one of the worst economic backdrops in over 80 years and while restricting the investment public from purchasing their funds.  DFA funds, as many of you know, can only be bought by institutional clients and a very select group of Investment Advisors including Grecu Capital Management, Inc.

It was our belief 10 years ago, and it remains our belief today, that DFA provides the best tools for engineering low-cost and thoughtfully diversified global portfolios for both our private wealth and retirement plan clients.  DFA is no longer a secret and we hope with your help Grecu Capital Management will join them in the spotlight. If you have any friends, family or colleagues that you think might benefit from working with us and having access to superior investment tools, we would greatly appreciate your thoughtful referral in 2014.  Grecu Capital Management's services are best suited for those with $1 million or more to invest.