Another may, another decline of the stock market? Perhaps not

It is understandable, if may meet investors with apprehension.

After all, there are equities in a market near the bear that has pushed stocks lower by more than 19% a year. That came after a very promising start for the year, a model who is also produced in 2010. And this year until April, the index Standard & poor 500-stock returned almost 12%.

Will be economic concerns may dash of early signs of optimism once more this year?

Michael j. Cuggino, President of the permanent family of the portfolio of the Fund, sees troubling Parallels. This winter, he said, "you have the feeling that"boy, we are finally out of the forest. " And then all of a sudden you start seeing softer economic signs. »

Those are still another set of concerns from Europe - including the financial crisis and that Britain has slipped into recession the Spain - with high oil prices and a hand of work still-low of the market at home. In April, there is a net gain of only 115,000 jobs, much less than had been forecast.

But many strategists believe that enough has changed that other severe withdrawal is not a fait accompli. "The fundamental point of view, there are a number of differences," said Brad Sorensen, Director of the sector analysis and the market at the Schwab Center for financial research.

Take the price of the gasoline. In the first four months of the year, national action began to sink in May that soaring pump prices, weighing on the consumer already poorly. In early May 2011, a gallon of unleaded regular averaged $3.96, according to the Energy Information Administration. Which has increased 37 percent from the same period in 2010. So far this year, gas remains uncomfortably high, but at $3.83 a gallon on average fuel is actually less expensive that it was a year ago.

This is a critical point. Ned Davis Research analysis showed that the rate of change in price of gas is an important influence on the attitudes of the investors. Researchers there found that only when the pump prices jump more than 30% over a period of 12 months no actions tend to lose ground. And when the fuel prices have fallen over a period of one year, the s. & P. 500 averaged 12.8% of earnings.

Mr. Sorensen added that there were another big difference this year. Although oil prices are on the rise since January 1, it is not the price of many other products. Since the end of the year, have been the price of corn on the dish, wheat fell slightly and natural gas sank more than 23%.

Why is it important? In 2011, global fears about inflation, especially around the high cost of food in emerging markets, has led central banks around the world to increase interest rates. This year, the policy makers in many of these areas - including China and the India and even in Europe, the European Central Bank - have been lowering rates to boost growth. Last week, the Reserve Bank of Australia reduced rate of half a percentage point, citing the weakness of the economy and mild inflationary pressures.

"This significantly change the image of recent years," said Mr. Sorensen.

"Jeffrey n. Kleintop, senior strategist market of LPL Financial, said the Central Bank rate cuts" should help to mitigate the fears of global recession evident in the two years of spring slides. »

Of course, with treasuries 10 years producing little 1.88% today, down 3.7% in May 2010 and 3.29% a year ago, the bond market could be signalling that the economy remains troubled. But James w. Paulsen, strategist main Wells Capital management investment, note that the by-product of these low yields - falling borrowing rates - help consumers in the short term.

He notes, for example, that in May 2011 and may 2010, the average 30-year fixed rate mortgage were about 5 percent. Today, they are below 4%, which should stimulate the refinancing. In addition, household debt service ratio, which measures the debt payments as a percentage of disposable personal income, keeps declining. According to the Federal Reserve, debt payments accounted for approximately 13.4% of income available in early 2009. Which fell to 12.3% in the first quarter of 2010, 11.2% in early 2011 and 10.9% late last year.

During this time, the image of the profits of the business seems much brighter that he has also recently that there a month. In April, Wall Street analysts were forecasting growth flat profit of less than 1% for companies in the s. & P. 500 in the first quarter. But with autour 85percent of these companies having reported their results, forecasts of the consensus for the growth of earnings have increased 7.2%.

Finally, there is another factor that could buoy the market in spring and summer. Brian d. Singer, head of strategies global macro to William Blair, noted that in 2010, the threat of the possible expiration of the Bush reduced year-end tax could have accelerated activity that would have normally taken in 2011. That may have further weakened the economy last year, he said.

With these same defined new tax cuts expires at the end of this year, this could still accelerate 2013 activity in this year, Mr. Singer said, the economy in 2012. He said that this is one more reason to think that "it y more differences than similarities between this year and 2011.".

Paul j. Lim is the editor of money magazine. Email: fund@nytimes.com.

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As the Market Lurches, New Options to Avoid Getting Seasick

AppId is over the quota
AppId is over the quota
WHEN it came to stock market volatility, 2011 was pretty close to the mother of all roller-coaster rides.

The Standard & Poor’s 500-stock index had several daily swings of 2 percent or more in August alone. The Dow Jones industrial average seesawed more than 400 points for four straight days that month. With the sturm und drang of European and American debt woes continuing, we may see more bipolar market oscillations.

The investment climate — even among wealthy investors — has cooled toward stocks that have full exposure to the market’s ups and downs. A recent survey by the Spectrem Group found that “while somewhat more moderate in risk tolerance than in 2009, investors remain more interested in protecting principal than growing their assets.”

So it comes as no surprise that Wall Street has hatched a new generation of products that cater to those who hate market volatility. Not only can you reduce your exposure to the most spasmodic stocks, you can also bet against wild price swings, although neither strategy is a flawless safeguard against market risk.

This new generation of “low-volatility,” exchange-traded funds focuses on established companies with consistent earnings flow and dividends.

You can now find a low-volatility fund for nearly every corner of the global stock market. The PowerShares S.& P. 500 low-volatility fund invests in 100 companies from the index that “exhibited the lowest sensitivity to market movement, or beta, over the past 12 months.”

Skittish about emerging-market stocks? The iShares MSCI Emerging Markets Minimum Volatility Index Fund could be worth a look. Tilting more toward small companies in the United States? The Russell 2000 Low Volatility fund focuses on small- and micro-cap stocks with strong growth prospects.

What if you want to bet squarely against the downward volatility of the S.& P. 500 index? Then you might consider the iPath S.& P. 500 Short-Term VIX fund, a complex exchange-traded fund based on futures contracts that track the implied volatility of the index.

For an even broader approach, Lance Gunkel — a fee-only certified financial planner with Sherpa Investment Management in West Des Moines, Iowa — uses the SEI Managed Volatility Fund, which covers a low-volatility index representing 3,000 stocks that may also invest in futures and options. The fund’s load-adjusted return was nearly 10 percent compared with a nearly flat performance for the S.& P. 500 Index last year.

The companies in the low-volatility funds he chooses for his clients tend to be “cash-flow rich with low price/earnings ratios, dividend paying with a value tilt,” Mr. Gunkel said.

While there is an appeal to tamping down portfolio extremes, the low-volatility strategy is no substitute for a comprehensive reduction of market risk. While many low-volatility funds track stocks that have had fewer price swings on average over the last year, that may not be the most prudent way to avoid future volatility.

If low-volatility funds were concentrated in “safer” stocks like dividend-rich utilities and major energy producers in 2011, unless they shifted gears to match market sentiment for this year’s favored sectors, they might fall victim to “sector rotation,” as professional money managers shift into other industries and sell the favored stocks of the previous year. Last year’s darlings may be this year’s goats.

Also keep in mind that most of these funds have been started within the last few years. Few, if any, have been battle-tested in a 2008-style collapse, which is when you would need them to offer real protection. (And they are not to be confused with balanced funds that have a mix of bonds or cash, or more exotic “inverse” funds that move in the opposite direction of stocks.)

Lee Munson, the author of “Rigged Money” and a financial planner and registered adviser with Portfolio, in Albuquerque, said he was “offended by the gentle marketing lie” of low-volatility funds because they did not address the larger need to reduce market risk in times of market crisis. Every low-volatility fund is still exposed to the market. And still looming is “event risk,” like the threat of a European country defaulting on its debt.

A lot of investors, Mr. Munson maintained, mistakenly “confuse low volatility with low risk,” adding: “You can’t call a Lexus a Mercedes. People think that when the market goes down, I won’t get hurt in these funds. They’re all stocks.”

Mr. Munson suggested a more enlightened view that looks at “risk budgeting,” or gauging how much risk you can take, and design a portfolio that tracks your tolerance — or intolerance — for stock market exposure.

It is also possible to reallocate easily to include more bonds to offset equity holdings. Real diversification includes investments that do not move in lock step when the market turns south.

A qualified investment adviser or certified financial planner can also help you hedge risk in other ways, like buying options on specific stocks or indexes you may own. The goal, as always, is to developthe portfolio that best provides for your needs in the least stressful way.

View the original article here

As the Market Lurches, New Options to Avoid Getting Seasick

The remote server returned an unexpected response: (417) Expectation failed.
The remote server returned an unexpected response: (417) Expectation failed.
WHEN it came to stock market volatility, 2011 was pretty close to the mother of all roller-coaster rides.

The Standard & Poor’s 500-stock index had several daily swings of 2 percent or more in August alone. The Dow Jones industrial average seesawed more than 400 points for four straight days that month. With the sturm und drang of European and American debt woes continuing, we may see more bipolar market oscillations.

The investment climate — even among wealthy investors — has cooled toward stocks that have full exposure to the market’s ups and downs. A recent survey by the Spectrem Group found that “while somewhat more moderate in risk tolerance than in 2009, investors remain more interested in protecting principal than growing their assets.”

So it comes as no surprise that Wall Street has hatched a new generation of products that cater to those who hate market volatility. Not only can you reduce your exposure to the most spasmodic stocks, you can also bet against wild price swings, although neither strategy is a flawless safeguard against market risk.

This new generation of “low-volatility,” exchange-traded funds focuses on established companies with consistent earnings flow and dividends.

You can now find a low-volatility fund for nearly every corner of the global stock market. The PowerShares S.& P. 500 low-volatility fund invests in 100 companies from the index that “exhibited the lowest sensitivity to market movement, or beta, over the past 12 months.”

Skittish about emerging-market stocks? The iShares MSCI Emerging Markets Minimum Volatility Index Fund could be worth a look. Tilting more toward small companies in the United States? The Russell 2000 Low Volatility fund focuses on small- and micro-cap stocks with strong growth prospects.

What if you want to bet squarely against the downward volatility of the S.& P. 500 index? Then you might consider the iPath S.& P. 500 Short-Term VIX fund, a complex exchange-traded fund based on futures contracts that track the implied volatility of the index.

For an even broader approach, Lance Gunkel — a fee-only certified financial planner with Sherpa Investment Management in West Des Moines, Iowa — uses the SEI Managed Volatility Fund, which covers a low-volatility index representing 3,000 stocks that may also invest in futures and options. The fund’s load-adjusted return was nearly 10 percent compared with a nearly flat performance for the S.& P. 500 Index last year.

The companies in the low-volatility funds he chooses for his clients tend to be “cash-flow rich with low price/earnings ratios, dividend paying with a value tilt,” Mr. Gunkel said.

While there is an appeal to tamping down portfolio extremes, the low-volatility strategy is no substitute for a comprehensive reduction of market risk. While many low-volatility funds track stocks that have had fewer price swings on average over the last year, that may not be the most prudent way to avoid future volatility.

If low-volatility funds were concentrated in “safer” stocks like dividend-rich utilities and major energy producers in 2011, unless they shifted gears to match market sentiment for this year’s favored sectors, they might fall victim to “sector rotation,” as professional money managers shift into other industries and sell the favored stocks of the previous year. Last year’s darlings may be this year’s goats.

Also keep in mind that most of these funds have been started within the last few years. Few, if any, have been battle-tested in a 2008-style collapse, which is when you would need them to offer real protection. (And they are not to be confused with balanced funds that have a mix of bonds or cash, or more exotic “inverse” funds that move in the opposite direction of stocks.)

Lee Munson, the author of “Rigged Money” and a financial planner and registered adviser with Portfolio, in Albuquerque, said he was “offended by the gentle marketing lie” of low-volatility funds because they did not address the larger need to reduce market risk in times of market crisis. Every low-volatility fund is still exposed to the market. And still looming is “event risk,” like the threat of a European country defaulting on its debt.

A lot of investors, Mr. Munson maintained, mistakenly “confuse low volatility with low risk,” adding: “You can’t call a Lexus a Mercedes. People think that when the market goes down, I won’t get hurt in these funds. They’re all stocks.”

Mr. Munson suggested a more enlightened view that looks at “risk budgeting,” or gauging how much risk you can take, and design a portfolio that tracks your tolerance — or intolerance — for stock market exposure.

It is also possible to reallocate easily to include more bonds to offset equity holdings. Real diversification includes investments that do not move in lock step when the market turns south.

A qualified investment adviser or certified financial planner can also help you hedge risk in other ways, like buying options on specific stocks or indexes you may own. The goal, as always, is to developthe portfolio that best provides for your needs in the least stressful way.

View the original article here

Corporate Profits Have Stalled. Has the Market?

The remote server returned an unexpected response: (417) Expectation failed.
The remote server returned an unexpected response: (417) Expectation failed.
When it comes to predicting the market’s direction, however, it may not matter if equities are undervalued or overvalued. Historically, strategists note, high price-to-earnings ratios don’t prompt sell-offs themselves. The real issue, they argue, is whether the market’s P/E ratio has room to grow.

 And that remains a big question.

 P/E ratios, which are used to gauge market sentiment and valuations, rise or fall based both on earnings and the price that investors are willing to pay for each dollar of that profit.

When optimism about the markets and the economy’s health started to take off late last year, the P/E of the Standard & Poor’s 500 index, based on projected profits over the following 12 months, jumped from about 10 to more than 13 in less than six months.

The problem is that earnings growth has ground almost to a halt — profits for companies in the S.& P. 500 are expected to grow just 1 percent in the first quarter and 2 percent in the second. That means that the only real hope for additional stock market gains this year is expansion in the P/E ratio, which may be bumping up against a ceiling.

“We already got a year’s worth of returns in just three months,” says Mark D. Luschini, chief investment strategist at Janney Montgomery Scott, referring to the first-quarter gain of 13 percent in the S.& P. 500. “That would suggest we borrowed a bit from the future.” And that, in turn, would imply that price-to-earnings ratios are more likely to fall than rise.

They’ve already started to do just that. Since the market began to pull back early this month, the index’s P/E, based on projected earnings, has fallen to around 12.5, from 13.1.

Lingering fears in the global economy may also weigh down P/E’s, says Jason Hsu, chief investment officer for the investment consulting firm Research Affiliates. Last week, for instance, a sudden jump in Spain’s bond yields renewed concern that the worst of Europe’s debt crisis may not be over.

Yet there may be another reason that P/E ratios won’t grow, Mr. Hsu says. The price that investors are willing to pay for earnings tends to jump most in the very early stages of an economic recovery, when optimism is teeming and growth is robust, he explains — but the current bull market is already three years old.

 Indeed, in the last 70 years, the price-to-earnings ratio of the S.& P. 500, based on reported earnings, has typically surged more than 30 percent in a bull market’s first year — and peaked in that first year, according to an analysis by Sam Stovall, chief equity strategist at S.& P. Capital IQ.

 Doug Ramsey, chief investment officer at the Leuthold Group, prefers to analyze P/E ratios by using actual average profits over the last five years, thus smoothing out extreme highs and lows in the cycle. By that measure, the P/E of the index recently climbed as high as 20.4, slightly higher than the historical median ratio at bull-market peaks dating back to 1876.

 That doesn’t necessarily mean, however, that this bull has run its course.  Mr. Ramsey notes that there have been plenty of cases when the market has soared above a P/E of 20. In 1998, for example, the five-year average P/E of the S.& P. 500 stood at 27.7. Historically, he adds, individual investors have a knack for stepping into the market when the ratio is already elevated, as they often wait until stocks are high before buying. If stock mutual funds experience an influx of new money from retail investors — which he says could be likely in light of improvements in the employment outlook — modest market gains could be achieved this year.

 Finally, don’t count out profits just yet, says Jack A. Ablin, chief investment officer at Harris Private Bank. Though earnings for companies in the S.& P. 500 are expected to be largely flat in the first half this year, analysts predict a modest rebound in the second half.

According to S.& P. Capital IQ, which tracks earnings estimates for S.& P. 500 companies, the consensus on Wall Street is that corporate profits will rise 5.9 percent in the third quarter and 16.3 percent in the fourth quarter, compared with the year-earlier periods. For the full year, that means earnings could grow by a modest 6.4 percent. While that’s a far cry from the 16 percent growth rate in 2011, Mr. Ablin says that “it’s too early in the earnings season to quit and sit out the market.”

Paul J. Lim is a senior editor at Money magazine. E-mail: fund@nytimes.com.

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