The Markets

The financial markets are currently filled with contradictions and that’s contributing to head-scratching and risk-aversion on the part of investors.

Consider these head-scratchers:

  • Mortgage rates are at a 50-year low, yet the housing market is still severely depressed.
  • Ten-year Treasury yields hit a record low last week even though the government just experienced a downgrade in its credit rating and it is running trillion-dollar annual deficits.
  • Gold prices hit a record high last week even though gold pays no interest and the core inflation rate is running below 2 percent.
  • The value of the dollar fell to a record low against the Japanese yen last week even though Japan has been mired in a slump for 20 years and “Japanese government debt is more than double the Euro Area average and more than double the US,” according to Jim O’Neill at Goldman Sachs.

Sources: Bloomberg, MarketWatch

The situations described above suggest there are “distortions” affecting the markets that may not be explained by traditional portfolio theory.

One distortion that has clearly impacted the markets is government policy and intervention. In just the past three years, we’ve seen the $700 billion Troubled Asset Relief Program (TARP), the $787 billion American Recovery and Reinvestment Act, the Federal Reserve’s zero interest rate policy, and the Fed’s QE1 and QE2 bond purchases. All these have generated numerous market side effects.

In addition, a major argument is unfolding between politicians who believe government intervention is necessary to prevent an even worse downturn and those who believe the free market should be left to fend for itself. Some politicians are even calling for the abolishment of the Federal Reserve.

A similar situation is playing out in Europe. For more than a year, European governments have scurried from one bailout strategy to the next in order to prevent a sovereign default.

All these distortions and philosophical debates are, not surprisingly, causing confusion in the financial markets. The result — a stagnant economy and falling stock prices.

The denouement of these interventions and political squabbles is unknown. What we do know is we continue to do all we can to help ensure your goals and objectives are met.

Data as of 8/19/11

1-Week

Y-T-D

1-Year

3-Year

5-Year

10-Year

Standard & Poor’s 500 (Domestic Stocks)

   -4.7%

-10.7%

  4.8%

-3.9%

-2.8%

-0.4%

DJ Global ex US (Foreign Stocks)

-3.1

-13.1

0.1

-3.5

-2.3

4.3

10-year Treasury Note (Yield Only)

2.1

N/A

2.6

3.8

4.8

4.9

Gold (per ounce)

6.5

31.0

49.8

32.8

24.2

20.9

DJ-UBS Commodity Index

1.3

-2.1

20.3

-5.8

-1.5

4.5

DJ Equity All REIT TR Index

-3.1

-3.5

9.8

-0.1

-1.0

8.9

Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.  Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.  Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  N/A means not applicable or not available.

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