The Monarch Report
July 30, 2012
The Markets
“Within our mandate, the ECB is willing to do whatever it takes to preserve the euro and, believe
me, it will be enough.”
--Mario Draghi, European Central Bank (ECB) President
It’s quite amazing how one sentence from one man can help spark a major rally in stocks, bonds,
and the euro currency. Draghi’s comments last Thursday in London represent a significant
ramping up of the ECB’s willingness to use its resources to hold the euro together and investors
responded enthusiastically. On the day of Draghi’s comments:





The euro and the British pound each gained more than 1 percent against the U.S. dollar.
Stocks were positive in nearly all European markets.
Italian and Spanish indexes each jumped more than 5 percent.
The Spanish 10-year bond yield dropped nearly half a percentage point from the day before
and the 10-year Italian bond yield was down a similar amount.
The S&P 500 index rallied 1.6 percent.
Sources: The Wall Street Journal; CNBC
Between Draghi in Europe and Fed Chairman Ben Bernanke in the U.S., central bankers seem to
be exerting an outsized influence on the markets. Normally, you expect markets to roughly trend
with corporate earnings.
Speaking of earnings, several high-profile companies including Amazon, Facebook, and
Starbucks, fell short on their second quarter earnings numbers released last week, according to
CNBC. Overall, earnings for the companies reporting so far this quarter have been a bit on the
light side, according to CNBC.
While earnings ultimately matter in the long run, today’s markets seem focused on the support
provided by central banks. And, yes, an up market is an up market regardless of what’s propelling
it. However, for long-term sustainability, we need the markets to go up based on their earnings
growth – not artificial stimulus.
Data as of 7/27/12
Standard & Poor's 500 (Domestic Stocks)
DJ Global ex US (Foreign Stocks)
10-year Treasury Note (Yield Only)
Gold (per ounce)
DJ-UBS Commodity Index
DJ Equity All REIT TR Index
1-Week
1.7%
0.9
1.6
2.7
-1.9
1.0
Y-T-D
10.2%
1.4
N/A
2.8
2.0
17.2
1-Year
7.3%
-16.9
3.0
-0.4
-13.1
13.6
3-Year
12.2%
2.3
3.7
19.2
5.1
29.4
5-Year
-1.0%
-6.6
4.8
19.6
-3.4
4.9
10-Year
4.4%
5.8
4.5
18.2
4.0
11.3
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.
THE BEST AND THE WORST DAYS IN THE STOCK MARKET tend to occur rather close
to each other and that has major implications for how to be a successful investor.
While it’s tempting to try to aggressively “time” the stock market and be in on the best days and
sitting in cash on the worst days, that’s not a viable strategy. The chart below shows how just a
few days each decade made a profound impact on the performance of the market over that decade.
Annualized
Return by
Decade
Decade
1970s
1.6%
1980s
12.6
1990s
15.3
2000s
-2.7
Source: BMO Capital Markets
Return
Excluding 10
Best Days
-2.3%
7.6
11.0
-9.2
Return
Excluding 20
Best Days
-5.0%
4.6
8.0
-13.2
Return
Excluding 30
Best Days
-7.2%
2.0
6.0
-16.9
Return
Excluding 40
Best Days
-9.1%
-0.4
3.0
-19.5
For example, during the 1980s, the S&P 500 had an average annualized return of 12.6 percent.
However, if you excluded the return of the 40 best days during that decade, then the return would
have fallen to a negative 0.4 percent. In other words, just 40 days out of that 10-year period
accounted for all of the return for the decade. Wow!
Now, you also have to know that missing the 40 worst days during the decade would have a
profound positive impact on your performance. But, here’s the rub – it would take perfect
foresight to know in advance when these 40 best and worst days would occur. And, of course,
none of us have that.
What makes aggressive timing even more difficult is that these best and worst days often happen
pretty close to each other. BMO Capital Markets discovered that since 1970, more than 50 percent
of the 40 best days occurred within two weeks of one of the 40 worst days! So, imagine this… the
stock market has one of its worst 40 days for the decade and you are lucky enough to be sitting
100 percent in cash that day. Now, realistically, after a big drop like that, are you going to have the
nerve to jump 100 percent right back in? If you didn’t, you’d miss more than half of the 40 biggest
up days since those big up days often occur within two weeks of a big down day.
The lesson here is simple. Markets are volatile and the price of long-term return is enduring the
pain of periodic declines.
Weekly Focus – Think About It…
“The most important thing in the Olympic Games is not winning, but taking part; the essential
thing in life is not conquering, but fighting well.”
--Pierre de Coubertin, founder of the modern Olympic Games
Best regards,
Your Monarch Team
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Securities offered through LPL Financial, Member FINRA/SIPC.
* This newsletter was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the
named broker/dealer.
* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be
representative of the stock market in general.
* The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance
of the global equity securities that have readily available prices.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the
U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark
for the long-term bond market.
* Gold represents the London afternoon gold price fix as reported by the London Bullion Market
Association.
* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity
futures market. The Index is composed of futures contracts on 19 physical commodities and was launched
on July 14, 1998.
* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the
Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific
periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to
predict future performance.
* Past performance does not guarantee future results.
* You cannot invest directly in an index.
* Consult your financial professional before making any investment decision.
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line, or write us at krista.bowen@lpl.com.
Sources:
http://online.wsj.com/article/SB10000872396390443477104577550710566458228.html?mod=WSJ_hp_L
EFTWhatsNewsCollection
http://www.cnbc.com/id/48335105/
http://www.cnbc.com/id/48335982
http://research-ca.bmocapitalmarkets.com/documents/F0D72405-29FD-46E1-A800-3AC70C262AE0.PDF
http://www.psychologytoday.com/blog/here-there-and-everywhere/201207/27-quotes-the-olympics