Making Cents

The Potential of the BRIC Nations

Posted by ICMC Staff on 17 February 2010 | 1 Comments

Tags: BRIC, Brazil, Russia, India, China, Foreign Stocks, Foreign Markets, Investing, Asset Allocation, Financial Planning, Economic

Brazil. Russia. India. China. These four nations have some of the fastest-growing economies on earth and are becoming drivers in the world economy. In the coming decades, they may command as much attention as the U.S., Japan and other “heavy hitters” … or more.

The future aside, we know one thing about the BRIC nations and other emerging markets: collectively, stocks in these countries have outperformed U.S. stocks for the last 20 years.

During this past decade alone, the MSCI Emerging Markets Index brought a total return of 102.4% while the S&P 500 posted a total return of -10.0% (-24.1% before dividends). Across the 1990s, the S&P 500 produced a total return of 432.0% - pretty impressive. Yet the MSCI Emerging Markets index posted a total return of 2408.6% for that decade.(source)(source)

Great volatility … but also great potential. If U.S. stocks soar or fall, emerging markets really feel the effect. We’ve seen them recoil in the first quarter of 2010. Yet short-term slumps aside, there are compelling arguments for investing in emerging market equities as part of a diversified portfolio.

Look at last year’s returns. In 2009, the benchmark index in Brazil (the Bovespa) gained 82.66%. Russia’s RTS gained 128.62%. India’s Sensex 30 advanced 81.03% and China’s Shanghai Composite rose 79.98%.(source)

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2009: The Financial Year in Review

Posted by Curtis A. Smith, CFP® on 13 January 2010 | 1 Comments

Tags: economic, federal reserve, foreign markets, commodities, investing, inflation, quarterly update,

The year in brief. The market improved; the economy improved. The doomsayers with visions of “Dow 4,000” were disproven. The Great Recession in all probability ended. Unemployment reached  and remains at 10%, and major automakers went bankrupt, reorganized and shed brands. Stocks went on a nine-month rally of historical proportions. Major healthcare reform made its way through Congress. It was a hard year for Main Street but a gratifying year for Wall Street.

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Fourth Quarter 2009 Economic Update

Posted by ICMC Staff on 6 January 2010 | 0 Comments

Tags: Economic, Commodities, Financial Planning, Foreign markets, Investing, Quarterly Update

The quarter in brief. The rally continued, the economy showed definite signs of improvement, and the biggest health care reform in decades inched toward reality. Stocks upwardly appreciated, with the S&P 500 rising 5.49% for the quarter.(source) Commodities experienced even higher gains. A wave of buyers rushing to take advantage of federal credits helped the real estate market. World economies were growing healthier.

Domestic economic health. Let’s look back at some key economic indicators during the quarter. Consumer spending, for one. Personal spending rose 0.6% in October and 0.5% in November; personal incomes rose 0.3% for October and 0.4% for November.(source) The jobless rate climbed to 10.2% for October, then declined to 10.0% with only 11,000 jobs lost in November, the tiniest payroll decline since the start of the recession.(source) Remember, the consumer is 70% of the economy, and it will be interesting to see if there really was a Christmas spending spree this year. This is doubtful, as consumers remain nervous about government spending and taxation legislation Congress may soon enact.

The key U.S. manufacturing index (the ISM) went 55.7, 53.6 and 55.9 across October, November and December – victories three, four and five, if you will, in a five-month winning streak.(source) Its sibling, the ISM service sector index, went from 50.6 in October to 48.7 for November (the new orders gauge came in at 55.6 and 55.1 those successive months).(source) Durable goods orders rebounded from a 0.6% decline in October to a 0.2% gain the ensuing month.(source)

The Consumer Price Index rose 0.3% in October and advanced 0.4% for November. For November, there was actually a year-over-year rise in CPI (+1.8%). PPI rose shockingly in November (+1.8%) after a 0.3% gain the previous month; the shock was mostly due to a 6.9% month-over-month jump in the price of energy goods.

The Federal Reserve kept interest rates at record lows while dropping occasional hints that rates might necessarily rise in coming quarters. After much contention, the House and Senate passed differing versions of health care reform legislation, with the bills yet to be reconciled as 2009 drew to a close.

Major indexes. The fourth quarter of 2009 was not as amazing for the market as the preceding quarter, but we’ll take it just the same. The fourth quarter brought a big descent in the CBOE VIX (the “fear index” fell 14.92%). With a strong concluding quarter, the Dow gained 59.28% from the March 9 close to the end of the year. The S&P 500 and NASDAQ respectively gained 64.83% and 78.87% in the same time frame.(source) Does it feel like a great year? These returns are amazing considering the collective mood of the country currently.

%Change	4QTR2009	3QTR2009	YTD 2009
Dow Jones	+7.37%	+14.98%	+18.82%
NASDAQ	+6.91%	+15.66%	+43.89%
S&P 500	+5.49%	+14.98%	+23.45%
10 YR TIPS	-5.13%	-12.36%	-30.84%

Global economic health. The data suggests a global recovery is in full swing, with Asia’s economies leading the way. By December, manufacturing indices in China, South Korea, India and Taiwan all showed growth (though Australia’s actually showed contraction).(source) The PMIs in Europe followed suit. The Eurozone PMI was 51.2 in November and 51.6 in December. PMIs in Germany, Italy, England and France were all above 50 for December, with France’s index the highest at 54.7. At the quarter’s end, manufacturing in the U.K. was growing at the fastest rate in two years.(source)

The IMF and the OECD respectively predict 3.1% and 3.4% growth for the global economy in 2010, with the bulk of emerging and developing economies heating up to 5% growth or better. In this quarter, we learned that China’s economy grew 9.0% in 3Q 2009 as India’s economy grew 7.9%.(source)

World financial markets. Investors cheered worldwide as stock indices made further impressive gains. Would you have guessed the Nikkei 225 would have climbed 4.08% in the fourth quarter? It did, and that index climbed 19.04% in 2009 – its first positive year since 2006. Hong Kong’s Hang Seng gained 4.38% in 4Q 2009, and the Shanghai Composite advanced 17.91%. The U.K. FTSE 100 rose 5.43%.(source) The MSCI World Index rose 4.11% in the quarter. The MSCI Emerging Markets Index rose 6.88%.(source)

Commodities markets. The hottest commodity of this quarter was orange juice: prices rose 41.04% in three months. Palladium prices rose 36.65%. Corn prices were up 20.49%. Many other commodities gained between 10-20% last quarter: sugar (+11.73%), copper (+18.71%), platinum (+13.54%), crude oil (+12.39%), heating oil (+17.97%), oats (+18.88%), natural gas (+15.10%), milk (+19.08%), wheat (+18.36%), gasoline (+15.15%) and diesel fuel (+13.63%). In fact, only two widely traded commodities went negative during the fourth quarter: coal (-4.64%) and cattle (-0.39%). Gold? Silver? Well, gold was +8.61% for the quarter and silver was +1.12%. Gold finished the quarter at $1096.20 per ounce. The U.S. Dollar Index gained 1.70% last quarter.(source)

Housing & interest rates. New home sales were down 11.3% for November after rising (a greatly revised) 1.8% for October; the numbers are up and down because first-time buyers thought federal housing credits geared to help them would expire this fall. Existing home sales rose (a revised) 9.9% for October and 7.4% for November.(source)(source) Pending home sales, which had risen for nine straight months, raised eyebrows by slipping 16.0% in December.(source) Housing starts reversed, diving 10.1% for October but rising 8.9% a month later.(source)

Mortgage rates of 30-year FRMs touched record lows but eventually climbed above 5% again. From the last 3Q Freddie Mac survey to the last 4Q Freddie Mac survey, the average interest rate on a 30-year FRM went from 5.04% to 5.14%. Across the quarter, averages on 15-year FRMs inched north from 4.46% to 4.54%. However, averages on 5-year ARMs moved south from 4.51% to 4.44%, and rates on 1-year ARMs went from 4.52% on September 24 to 4.33% on December 31.(source)

1st quarter outlook. For the first time in a long time, good news is nice to hear. Many analysts thinkwe are just two or three quarters into a U-shaped recovery that will play itself out across the next few years. Of course, there are concerns to watch: how the Fed and the Obama administration choose to wind down the stimulus effort, when and how the Fed finally makes a move with interest rates, and the indicators in the housing market. But barring a major geopolitical or economic event, much of the optimism (and federal support for the economy) will likely be sustained through the coming quarter and perhaps the next two. The Great Recession is slowly becoming a memory, and a classic “January effect” may kick off further upward movement on the major stock indexes. 

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November 2009 Monthly Economic Update

Posted by Curtis A. Smith, CFP® on 8 December 2009 | 0 Comments

Tags: Economic, Core Series, Financial Planning, Investing, Commodities, Foreign Markets

The month in brief. The Dow climbed 6.51% in November, and the S&P 500 and NASDAQ were nearly as hot.(source) Gold prices reached new highs, and home sales numbers were impressive. A recovery appeared certifiably underway, albeit the kind that featured an occasional step back. A debt crisis in Dubai only rattled stocks momentarily. Data showed consumer spending increasing, and Black Friday wasn’t bleak. 

Domestic economic health. Has unemployment peaked? The jobless rate came down to 10.0% in November from October’s 10.2% mark. As for next year, Federal Reserve policymakers predicted unemployment of 9.3-9.7% by 4Q 2010 – better, but hardly a forecast to celebrate. However, the great news in the November jobless stats; payrolls only contracted by 11,000 positions – the economy seemed on the verge of creating jobs again.(source)(source) Time will tell on employment gains.

The recovery was progressing, in fits and starts. We learned that consumer spending increased by 0.7% and wages increased by 0.2% in October.(source) The Black Friday weekend was solid, if not spectacular; National Retail Federation research gauged online and brick-and-mortar retail traffic at 195 million versus 2008’s 172 million. However, the average shopper spent $343.31 this Thanksgiving weekend compared to $372.57 a year ago.(source)

Turning to services and manufacturing, factory orders increased in October for the sixth month out of seven (+0.6%) while October durable goods orders fell (-0.6%).(source) The Institute for Supply Management’s November service sector index showed contraction (48.7 as opposed to a 50.6 reading in October) and its manufacturing index slipped from October’s 55.7 mark to 53.6 last month – still showing growth.(source)

After October declines, the two notable consumer confidence indexes presented a mixed bag: the Conference Board index went to 49.5 in November from 48.7 in October, but the Reuters/University of Michigan survey finalized at 67.4 for the month, down from 70.6 in October.(source)(source) We learned consumer prices had risen 0.3% in October, with core CPI +0.2%; the last figure put core CPI at +1.7% for the past 12 months of data, squarely within the Federal Reserve’s inflation target zone.(source)

Global economic health. All kinds of 3Q data were now available. Perhaps the cheeriest news was the Eurozone economy grew by 0.4% in the third quarter – the first positive quarter in the last six. German’s economy grew by 0.7%. Out of the major European economies, only the United Kingdom and Spain remained in recession.(source)(source) The Bundesbank, Germany’s central bank, forecast GDP of +1.6% for 2010 and +1.2% for 2011 after a -4.9% showing for 2009.(source)

Aided by a government stimulus and $1.3 trillion in loans, China’s economy expanded by a record 8.9% in the third quarter.(source) While data arrived showing Japan’s economy posting its second straight quarter of growth, the International Monetary Fund estimated the nation’s GDP would shrink by 5.4% for 2009.(source) Turning to the third and fourth largest economies in Asia, India’s economy grew by 7.9% for the third quarter, while South Korea’s economy grew by 3.2%.(source)(source)

World financial markets. The DAX led the way among major European indices with a 5.0% November gain. England’s FTSE 100 climbed 4.0% and France’s CAC 40 rose 3.2%. Among European indices of note, only the ISEQ (Ireland) posted a November loss. Turning to the Pacific, the Shanghai Composite went +3.4% while Hong Kong’s Hang Seng was -2.8% last month. The Singapore STRAITS Times was up 4.2%. The Australian All-Ordinaries took a 1.1% November loss. It was not a good month for the Nikkei 225, which dropped 9.5%. Eyeing emerging markets, Brazil’s Bovespa had the hottest month of any notable index (+9.0%). India’s Sensex was +4.6% as the month drew to a close, and Russia’s RTS was up 8.3% (and more than 130% YTD).(source) The MSCI World Index gained 2.88% last month, earning a +18.57% YTD mark. The MSCI Emerging Markets Index gained 3.24%, leaving it up +52.48% YTD.(source)

Commodities markets. When November ended, gold had settled at $1,181.10 per ounce (on its way to $1,200 in early December). The precious metal gained a jaw-dropping 13.60% ($141.40 per ounce) in November, its biggest monthly dollar gain since 1980. On November 30, gold was +33.67% YTD with a 24.10% cumulative gain across September, October and November. Copper gained 6.82% last month, bringing it to +125.70% YTD. Silver ended November +62.99% YTD, platinum +55.47% YTD and palladium +98.37% YTD. Oil prices rose $0.28 in November to $77.28 per barrel, which left oil +73.27% for 2009 YTD. At November’s end, oil prices had risen 11.27% across the last four months.(source) These returns may be the result of domestic political uncertainity. Do you think so?

Looking at farm commodities, wheat prices rose nearly 25% during the month and orange juice prices rose nearly 29%. Among notable ag futures, only cattle and sugar finished negative for the month.(source)

Housing & interest rates. With buyers rushing to qualify for potentially expiring tax credits and mortgage rates at or near record lows, the residential real estate market heated up. A rush of buyers in the South put new home sales at +6.2% for October, while existing home sales leapt north by 10.1%.(source) On the downside, housing starts dropped 10.6% in October to the lowest level since April.23 On the upside, pending home sales rose again: +3.7% in October, 32% above levels a year before.(source)

Interest rates on 30-year FRMs moved even lower. On November 25, Freddie Mac’s weekly survey had the national average at 4.78%, matching the record low set in April. Interest rates on 15-year FRMs were averaging 4.29%, 5/1-year ARMs 4.18%, and 1-year ARMs 4.35% at that date.(source)

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