In August, I was privileged to talk with Chicago area financial planner, Thomas Howard, Chairperson of the Illinois Financial Planning Association. Together, we reviewed an article by Rob Stein, published on the Advisor One website. http://www.advisorone.com/2011/08/17/signs-point-away-from-treasuries-but-not-because-o
Stein reported a rare event: “On August 10, 2011,… the S&P 500’s dividend yield at the close was 2.17%, which was above the yield on 10-year Treasuries of 2.14%.” This event is so rare that, during the past 53 years, it has only occurred three other times. The most recent occurrence came during the tumultuous period of 2008!
Stein offered a brief analysis of this data, pointing out that 12 months following the prior three “cross overs”, the average S&P 500 return was 18.5%. More particularly, the return twelve months following the 2008 “cross over” was 23.5%.
I need to emphasis that neither Mr. Stein, nor Mr. Howard, would ever claim pre-knowledge of market direction or magnitude of movement. We could go down or up from here. But Mr. Stein went on to suggest that fundamentals in 2011 are better than in 2008:
· Today, there is no liquidity crisis, as there was three years ago.
· Corporations are flush with cash.
· Corporate profits are at record levels, and more than 70% of earnings reports in Q2 2011 beat estimates.
· The broad economic data is still positive, admittedly slow, but positive nonetheless.
· We are adding about 150k jobs per month on average.
Mr. Stein also believes that, should the fundamentals in 2011 get worse, the markets have already “priced that in” (certainly believable after a fourth week of declines!). However, Mr. Stein clearly hints that a decline in “CONFIDENCE” (as opposed to economic data) is much more difficult to add to the investment equation. Mr. Stein wraps up his analysis by highlighting the importance of the Federal Reserve’s action earlier in August – promising low interest rates for at least two years.
Mr. Howard and I agreed that Mr. Stein’s analysis offers strong support for Tom’s current market view – namely:
1) The markets have been extremely challenging, in large part, due to an overwhelming lack of confidence in our national leaders.
2) Moving forward, investors will find very little yield in U.S. Treasury Securities, so it will be wise to diversify into a range of assets classes – from large cap, dividend paying multi-national firms to emerging market bonds, and to floating rate funds whose returns are tied to “hard commercial assets”.
