Shabri's Notebook

Quarterly Market Commentary – Q210

Volatility returns to markets

The second quarter brought renewed volatility, as markets continued to trade on fears of a global slowdown and worries over the worsening European debt situation. Markets ended the quarter to the downside, with major U.S. indices trading sharply lower on the last two days of the quarter. European markets were hardest hit, and there were ripple effects across global markets.

· The MSCI EAFE lost 13.97 percent for the quarter, and it has lost 13.23 percent for the year.

· The broad U.S. market, as measured by the S&P 500 Index, lost 11.43 percent for the quarter and is now down 6.65 percent year-to-date.

· The Dow Jones Industrial Average lost 9.36 percent for the quarter and is off 5 percent for the year.

Bonds are a bright spot . . . again

Bonds made strong gains during the quarter, helped in large part by a significant reduction in interest rates.

· The yield on the 10-year bond moved from 3.83 percent at the beginning of the quarter to 2.95 percent at the end of the quarter.

· The Barclays Capital Aggregate Bond Index gained 3.49 percent for the quarter and is higher by 5.33 percent for the year.

· As opposed to the beginning of the year, when credit-sensitive corporate and high-yield bonds saw strong gains, interest rate-sensitive U.S. Treasuries helped push the index higher last quarter.

Greece and the other “PIIGS”

Greece took center stage on the global news front as the severity of its debt crisis came to light.

· The nation had reached the end of its borrowing capabilities and was threatening to default on its outstanding debt.

· While Greece took most of the heat, other “PIIGS” nations—namely, Portugal, Italy, Ireland, and Spain—also began to raise the alert over difficulties in refinancing their own debt.

· The European Union provided a comprehensive aid package of roughly $1 trillion to avoid widespread default.

There could be a larger crisis looming, however.

· Roughly $3 trillion of debt is held by European banks, and ongoing concerns over this huge liability have helped pushed many of these bank stocks sharply lower.

· Global markets have continued to be cautious over the potential for further fallout from the debt crisis, which could add to volatility in the coming months.

The recovery continues, but how strong will it be?

Signs that the economy is continuing to move forward can be seen in the manufacturing sector.

· Companies have been rebuilding inventory and factory reorders have been strong.

· Industrial production ticked up 1.20 percent in May, after a 0.70-percent increase in April.

Yet this recovery is showing signs that it is not as strong as past recoveries.

· The Federal Reserve has continued to cite high unemployment, modest income growth, and tight credit as a caution to growth prospects, saying, “Financial conditions have become less supportive of economic growth on balance.”

· We believe this continues to support the argument that interest rates will remain low; we may even see short-term rates at or near zero percent through 2011.

There are also signs that the housing market is turning down again, following the expiration of the $8,000 tax credit.

· Only 300,000 new homes were sold in May—the lowest level since the Census Bureau began recordkeeping in 1963.

· Existing home sales also fell to 5.66 million units in May, from 5.79 million units in April.

Source: Bloomberg

Many economists also point to a less followed metric from the Economic Cycle Research Institute for some insight into the future health and direction of the economy.

· The readings for the Weekly Leading Index were down 6.90 percent for the week ending June 18, following a 5.80-percent decline the week before.

· In addition, first-quarter GDP estimates were lowered to a 2.70-percent annualized growth rate, from the initial reported estimate of 3 percent.

Investing in this “new normal”

Equity markets have definitely become more volatile recently, and investors need to be vigilant about risk, positioning portfolios to take advantage of the potential for a slower growth environment.

· Investors may want to seek market returns as well as income to help cushion some of the volatility and preserve capital.

· Income-producing stocks with strong fundamentals may make sense for investors, as could diversification within fixed income to help provide an ongoing income stream.

· Also, with the current turmoil in Europe, a focus on domestic holdings could prove to be more beneficial in the near term.

Disclosure: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. All indices are unmanaged and investors cannot invest directly into an index. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The Barclays Capital Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Barclays Capital government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a nondiversified portfolio. Diversification does not ensure against market risk.

Stormy Weather
By Brad McMillan, CFA^®, Vice President, Chief Investment Officer

On Friday, June 4, the S&P 500 Index took a 3-percent hit—with the other major market indices similarly losing ground—bringing its loss for the week to 2.25 percent. This was the second tough week for the index in a month, as it declined 4.30 percent for the week ending May 21. And the index was down 8.20 percent overall in May. What’s going on here?

Assumptions in question

Aggregate market valuation levels are based on general expectations of corporate earnings and required return levels. These can be further broken down into corporate performance and the health of the general economy. The major underlying assumptions about these factors—which have helped to fuel the substantial market recovery we’ve seen since March 2009—are two-fold:

1. That the U.S. economy is recovering strongly, and that employment and spending will continue to grow at rates at or above levels seen in the first quarter of 2010

2. That the financial system is largely healed, and that the debt and financial crises are over

But information over the past month or so—and last week in particular—has increasingly called these assumptions into question.

A struggling jobs sector

The most recent unemployment report came out on June 4. The actual number of jobs added was 431,000, which was significantly below expectations. On top of that, 411,000 of those new jobs were temporary positions created for the Census. The net gain of about 20,000 in private employment was down from 218,000 the month before.

This very significant slowdown in private employment growth suggests that the U.S. economy is not recovering as the stock market had assumed. Because consumer spending accounts for approximately 70 percent of the economy, a strong employment recovery is perceived as crucial for continued growth. If jobs growth stalls—and consumers reduce their spending as a result—the recovery stalls too. As current market valuations are based on assumptions for a continued strong recovery, anything that suggests a slowdown or, worse, a reversal in consumer spending will impact performance. And, indeed, the markets reacted badly to this report.

Global debt concerns

The other significant piece of information released last week was a report from the Hungarian prime minister’s office that default on Hungary’s sovereign debt was considered a real possibility. This cut directly to whether or not the financial crisis in Europe was over—if Hungary could default, what countries might follow?—and weakened the other underlying assumption of U.S. market value levels. The issue in this case is not so much what this would mean for the countries in question, but what this would mean for the global banking system.

There are other factors in the mix as well; most of them, though, relate to the two underlying assumptions. We are continuing to watch employment and income as the key leading indicators for the economy. For the markets, we consider cyclically adjusted price/earning ratios as the best indicators. At this time, neither suggests stronger performance ahead.

Continued volatility expected

The market losses over the past month reflect an attempt to adjust expectations to the emerging reality of the economy and the financial system. If employment growth continues to slow, or reverses course, then further market declines can be expected. Similarly, if evidence of more weakness in the U.S. and global financial system appears, expect the markets to react negatively. At this point, the probability of significant market movements appears to be weighted heavily to the downside. Continued strong economic growth and recovery now seem to be less likely in the months ahead, and it does not appear that the market has fully incorporated this change in expectations yet.

Over the long term, we believe that our markets and economy will eventually recover, but in the short term, we can expect further stormy weather. A diversified portfolio with exposure to fixed income and alternative assets, as well as to diversified equity strategies, may help investors ride out the storm with less volatility.

Disclosure: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. All indices are unmanaged and investors cannot invest directly into an index. The S&P 500 Total Return Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks and includes the effects of dividend reinvestment. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a nondiversified portfolio. Diversification does not ensure against market risk.

Look Who Made the Newspaper!

Shabri is quoted in Sunday's Frederick News Post. Check it out.

www.fredericknewspost.com/sections/business/display.htm

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July 2009 Advanced Strategies for a Rising Tax Environment
On January 1, 2010, nearly $1.4 trillion of retirement assets will become immediately eligible to be converted to a Roth IRA. CPAs need to plan now for 2010. Who will benefit from converting? Moore Wealth offered CPAs a training seminar on Roth Conversion. This is part of Moore Wealth's Platinum CPA CPE Seminar Series, now celebrating its 5th year.

Shabri and speaker, Chip Saltz, VP Wood Logan, Inc.

April 2009 Retirement: Why You Will Need More Than You Think
Shabri's on the front cover of the FNP's Senior Living Section this month. Check it out. Shabri on Retirement.

January 2009 Jane Helm, Senior Paraplanner
Not many people are familiar with the term paraplanner. Find out what Jane does at Moore Wealth...Senior Paraplanner makes news in the Frederick New Post.

January 2009 Economy Spurs Moore Wealth to Open a Financial Clinic

Frederick, MD --- January 12, 2009 On the last Friday of each month, Moore Wealth will offer a free financial clinic for those who have recently lost their jobs and need a strategy to preserve their savings and retirement investments.

This is a ”no strings attached” consultation which will concentrate on giving the individual guidance, options and strategies to think about. The consultation is approximately a half hour and is only available through appointment.

“Over 2.6 million people lost their jobs in 2008. In the Frederick and Montgomery county area, over 24,000 are unemployed. Whatever financial decisions these people make now could have a far reaching impact on their futures,” said Shabri Moore, CFP® and president of Moore Wealth. “This is one way I thought Moore Wealth could help.”

Ms. Moore said that she plans to offer this free service until June and will continue, if there is still a need. Clinic days are scheduled for January 30, February 27, March 27, April 24, May 29 and June 26. Appointments are limited and will be held at the Moore Wealth office at 50 Carroll Creek Way, Suite 335 in Frederick, MD. For an appointment, call 301-631-1207.

September 2009
National Life Insurance Awareness Month

January 2010 Market Recap

A disappointing start

Equity markets opened 2010 on an upswing, but a sell-off in the second half of the month pushed major U.S. indices into negative territory.

· The Dow Jones Industrial Average lost 3.32 percent, while the S&P 500 Index lost 3.60 percent—its first monthly loss since March 2009.

· Investors are left wondering whether the rally can continue, especially since the S&P 500 has gained more than 60 percent from its March lows and advanced more than 25 percent in 2009.

It’s becoming clear that the success drivers in 2009 probably won’t be the same ones to fuel performance in 2010.

· One difference has to do with fundamentals for stocks and bonds.

· Stock valuations have pushed higher; the price/earnings ratio on the S&P 500 is now more than 18 times trailing earnings. It was a little more than 14 times earnings in early 2009.

· Bond spreads have narrowed substantially in both the corporate and high-yield spaces to hover around their long-term averages. This makes a difficult case for a further narrowing of spreads, which would push prices higher and fuel gains.

· In fact, high-yield spreads actually widened by more than 50 basis points in the second half of January; corporate spreads widened as well.

· Despite this slide, the Barclays Capital Aggregate Bond Index gained 1.53 percent.

Revisiting the case for a weak market

Last month, we described scenarios for weak and strong markets in 2010. So far, the bears seem to have it right.

· Stocks looking to advance on better-than-expected data have instead sold off.

o Stocks briefly pushed higher on news of a strong gross domestic product (GDP) number—indicating that the economy grew at a 5.70-percent rate in the fourth quarter—on the last day of the month. Yet, by the end of the day, the markets had traded down sharply.

o This was perhaps a reaction to news that about 3.50 percent of the GDP number was attributed to a rebuilding of inventory, not to actual growth.

There are some signs, however, that the economy is improving.

· Consumer confidence rose to 55.9 in January.

· While likely not a sign that consumer spending is returning to pre-recession levels, the trend points to an improving economic outlook.

Still, investor optimism continues to be challenged by high unemployment.

· The rate in January fell slightly to 9.70 percent, but the economy still shed 20,000 jobs.

· It is unlikely that we’ll see a strong economic recovery without new job growth to drive spending.

The earnings keep coming strong

It’s difficult to ignore the strong fourth-quarter earnings reported thus far.

· As of January 29, 220 of the S&P 500 companies had reported earnings.

o 78 percent of them beat analysts’ estimates, while only 14 percent came up short.

o The blended earnings growth rate for the S&P 500 stood at 206 percent year-over-year.

Yet the market seems to be doing so, again raising concerns over the potential for near-term growth.

The government is still our business partner

The government continues to drive the Main Street agenda and is looking for ways to further influence actions on Wall Street.

· Because markets have reacted favorably to stimulus, monetary policy, and programs to purchase and support mortgage assets, it will be critical for the government to sustain the recovery.

· President Obama’s budget proposes modest spending cuts, but it still shows a projected deficit of $1.6 trillion for the coming year.

o This—coupled with his intention to raise taxes on individuals making more than $250,000, banks, and multinational companies—raises concerns over the budget’s potential impact on economic growth.

· The Democrats’ loss of their filibuster-proof majority following the Massachusetts senatorial election has also intensified concerns regarding future policy decisions.

Prepare for heightened volatility

Risk complacency at the end of 2009 is being replaced with the need for vigilance in the near term.

· The VIX, a measure of volatility in the S&P 500, rose from a compressed level of 18 to 25 by the end of January.

· While a far cry from the highs of 75–80 seen during the market downturn, it’s definitely a sign of renewed volatility in the equity markets.

It’s impossible to predict where the markets will head, but there are signs that this year will not be the same as last year.

· We suggest preparing for potential volatility—looking to reduce portfolio risk where possible—and advise you not to be afraid to realize some of the hard-earned profits in your portfolios.

· It’s our view that, while the economy will continue to chug along and markets may eke out modest gains in 2010, it is likely going to be a rough ride.

Disclosure: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Barclays Capital Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Barclays Capital government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities.

Authored by Simon Heslop, CFA^®, director of asset management, at Commonwealth Financial Network.

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Nearly 1 in 3 Americans do not have life insurance reports a 2008 national survey conducted by Heritage Union, a Richmond, VA Life Insurance Company. That means that about 77 million adult Americans are exposed to financial trouble if the worst was to happen.

Despite the reality of being uninsured, 77 percent of the same people surveyed believe it important to provide for loved ones after they were gone.

Shabri Moore, CFP®, president of Moore Wealth Inc., said, “This incongruity points to the fact that we, financial planners, have an obligation to make people aware of what is at risk without life insurance. That’s why September has been tapped as National Life Insurance Awareness Month.”

The theme for this year is the Wonders of Life.” We all have moments of wonder in our lives…witnessing the birth of a child, a baby’s first steps, graduations and wedding days are just a few,” adds Jane Helm, Senior Paraplanner at Moore Wealth. “Life insurance is a way to ensure the life that you’ve worked hard to achieve for your loved ones won’t come to a halt if something were to happen to you.”

The survey also found that of the Americans that do have life insurance, 22 percent believe that they don’t have enough cover to support their families if they ever needed to claim on the the life insurance policy.

The biggest reasons given by those surveyed for not having life insurance was the fact that it was too expensive. “What most people don’t realize is that the insurance companies offer products that are affordable to those who may have a pre-existing condition,” said Ms. Moore.

In honor of National Life Insurance Awareness, talk to a CERTIFIED FINANCIAL PLANNER™ professional who can guide you through what you need for adequate life insurance coverage and help you update your beneficiary information.

Shabri's Notebook

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