Written by J.D. Kaad, Portfolio Analyst

At the time I write this, the S&P 500 is down -1.69% year-to-date. By the end of this year, or even this week, a drastic change in either direction is not only possible, but likely. The only consistency the equity markets have shown us have come from its inconsistency and one cannot help but be curious as to what is driving the markets. 

The answer is plain and simple: Fear. Instead of financial fundamentals or technical trends, events abroad have been driving prices. Market fear or volatility is measured by the Chicago Board of Options Exchange Market Volatility Index or VIX for short. The chart was developed in 1993 by Prof. Robert E. Whaley and provides an estimate of the implied volatility of the S&P 500 over the next 30 days. This volatility is apparent in both anticipated increases and decreases in the S&P 500.  In practice, this tool provides us a window with which to anticipate market sentiment and motion.

When applied to the events in Europe, which has been the prime motivator for two years of market movement, you can see that with each defining event the VIX spiked. The first of these moments came in January 2010 when Greece’s budget deficit is revised upward to 12.7% from 3.7%, signaling that Greece’s ability to combat their own issues was limited. Another came 4 months later when the first bailout for Greece was passed by the EU amid criticism that it was insufficient to combat Greece’s issues. Each of these VIX spikes was drastic and immediately felt on the S&P 500, although these episodes of volatility were dwarfed by the events of 2008.

The collapse of Lehman Brothers started a volatility explosion which events in Europe have barely halved. That is to say during the worst periods of the 2008 U.S. Financial Crisis the volatility index foresaw a 25% move in the S&P 500 within a 30 day period, whereas Europe only created volatility meriting slightly more than a 10% movement. It is only in the duration of the crisis that Europe has exceeded our own influence on the S&P 500. The 2008 Financial Crisis lasted only six months, which then lead into the rally of 2009. The seemingly endless debate of the European Union has been a drag on domestic markets going on two years with each new failure resulting in elevated market risk.

The current elevated VIX is reflected with the skittish S&P 500, although with improving news from Europe, market volatility is starting to recede. These periods of a return to normalcy have been associated with market rallies and could represent a bullish open for 2012. Although there is little doubt that until the European Union comes to an accord as to their future, market volatility will remain a concern.

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Written by Terry Milberger, Director of Portfolio Management

Although the next Presidential election seems some time away, a lot of posturing is already taking place.  The hopeful Republican candidates are participating in a series of debates to poke at each other as well as blaming all of our problems on the President.  As Obama will be the Democratic candidate, he can focus all of his energy on beating up on the Republicans.

As the heated debates rage on, it is interesting to look at the Presidential election cycle to see if there is any consistent pattern of stock market returns.  Ned Davis Research calculated the average annual returns for the Dow Jones industrial average since 1900 for the different years of a presidential term.  The returns were 5.5% for Year 1; 3.7% for Year 2; 12.6% for Year 3 (which would be this year); and 7.5% for Year 4.  The consistency of some of the returns is quite remarkable.  Looking to Ned Davis Research data again, the stock market has risen in all of the past pre-election years and 80% of the election years.

What might account for the consistency of these returns?  Perhaps it is due to sort of a political business cycle.  The incumbent President, assuming he is running again, has a strong invested interest to see that the economy is performing well.  It is not unusual to see economic stimulus, such as good money supply growth, present a year or so before the next election.

How are stock market returns developing in this current election cycle?  In the year 2009, Year 1, the stock market was up about 20%.  In 2010, Year 2, the market was up about 12%.  So far this year, Year 3, the market was unchanged through the end of October.  The market did get off to a good start in this pre-election year as it was up around 9% through April.  Unfortunately, at that time the debt crisis in Europe, most specifically Greece, worsened which led to a major sell-off in global stock markets.

It seems like quite a stretch at this point to expect our stock market to provide the average return, 12.6%, experienced in Year 3 of the Presidential election cycle.  Let’s hope that there is enough progress on the debt crisis in Europe to enable the stock market to rally and keep intact the record of always having a positive return in the pre-election year.

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Written by Barbara Heller, Associate Financial Planner

The holidays should be a time of joy and sharing with family and friends.  However, it is also a time when thieves and scammers abound.  While shopping, eating, and celebrating, we also need to make sure to protect our identities and our assets.  Here are some tips that will help make you more secure and give some additional peace of mind:

Streamline your wallet.  Wallets and purses are easily stolen.  Consider only carrying your ID and a credit card.  However, if you do take your purse with you, only carry what you will need for the trip.  This means leaving extra credit cards, checks, and other identifying information at home.

Use your credit card. Credit cards give you much more protection than checks and debit cards if they are stolen. 

Monitor your account activity.  If you have online access to your bank and credit card accounts, frequently check them to verify there is no unauthorized activity.  Some companies allow you to have account alerts that notify you when any transactions occur on your account.

Be aware in public.  It is a good idea to be cautious and aware when using or giving personal information in public.  If you are verbally giving information or putting your PIN into a machine, verify that there is not anyone within earshot or line-of-sight that could obtain that information.

Protect your home.  During the holidays we often have individuals we don’t know in our house for parties, installations, etc.  Do not leave personal information where it is easily accessible. Make sure statements and checkbooks are locked up or at least put away.

Be cautious of sharing travel plans on social networking sites.  Information you put on your social networking sites may be available to many individuals you don’t know.  Be vague about your plans and specific dates so it is not clear when you will or won’t be home.

Beware of email scams.  Many offers come through email and it is often difficult to determine which are legitimate.  Make sure you read all fine print and also consider searching online to see if a company is reputable.  If you are unsure, err on the side of caution.

Make sure you use secure websites for online shopping.  Secured websites have https:// in their web address and a lock symbol on the browser status bar.  This is not a guarantee, but if the website does not have these it is definitely not a secure site.

Above all, make sure you stay alert and aware of your surroundings and who you give information to.  There is no way to be 100% safe, but by practicing these tips you will keep yourself from being easy prey for criminals.

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The Budget Control Act of 2011, passed just a few months ago, increased the debt limit of the federal government in a series of steps.  It also included measures aimed at reducing the deficit over the next ten years by at least $2.1 trillion.  This new law did not identify specific spending reductions or budget savings.  Rather, it established a new Congressional committee to come up with the actual cuts.  This committee must report its recommendations no later than November 23^rd of this year.

The committee is made up of 12 members: six Republicans and six Democrats.  It is divided evenly between the House and Senate.  If a majority of the committee members cannot reach an agreement on a plan, spending cuts will be automatically imposed on defense spending and a variety of other programs including some Medicare spending.  Some programs, such as Social Security, Medicaid, and military pay, would not be affected.  These same cuts will occur if the committee agrees to a plan but Congress does not enact it.  If the committee does approve a plan, Congress must approve it by December 23^rd. 

The Budget Control Act created expedited procedures for Congressional consideration of the bill.  This means that it cannot be changed or amended.  Furthermore, only a simple majority of both the House and Senate is required to pass the bill.  President Obama would need to sign the bill into law for it to go into effect.

It is difficult to predict what the committee may propose.  President Obama has submitted his own deficit reduction plan to the committee for consideration.  His plan includes higher taxes on upper-income households and savings from Medicare and Medicaid provider payments.  This proposal has gotten some media attention, but doesn’t seem likely to sway the committee much.

As we enter the month of November, it seems certain that the debate among Republicans and Democrats will heat up.  It seems likely that much of this debate will play out in public, particularly as the November 23^rd deadline approaches.  We must keep in mind that these public comments won’t likely reveal the whole story and progress hopefully will be being made behind the scenes.  It should be an interesting time.

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Written by Luanne Underwood, Associate Financial Planner

As you know, this month marked the passing of Steve Jobs at the young age of 56.  While there has been a lot of media coverage related to his life, I would like to mention a few notables here.  A lot of the coverage has been related to how Apple, the company he founded and which flourished under his guidance, has created technology that has literally changed our world.  In the haste of our technologically busy lives, we have come to be somewhat complacent about the computers, phones, music, and media affected by the genius of Jobs and others.  His passing has caused us to pause and really reflect on the immense impact the changes have had on our lives. 

What’s interesting is that while he was alive, I knew he was the founder and CEO of Apple.  I knew he was a genius and was the force behind the Apple comeback.  I even recognized his face.  That was about it.  I didn’t know at the age of 12, while tinkering in the garage workshop his father had set up, he called William Hewlett (the co-founder of Hewlett-Packard Co.) directly about some parts he needed for something he was trying to build.  I didn’t know that he was a college dropout, but attended classes anyway for another year and a half, and it was the calligraphy class he found fascinating which later influenced his belief that technology could be aesthetic.  During the time after he was forced out of the company he founded, he bought a computer graphics shop for $10 million and sold it (Pixar) 10 years later to Disney for $8 billion.  The more I read the more complex and interesting the man became.

What is inspiring is Steven Jobs’ ability to look at ordinary everyday things, create ideas, and transform those everyday things into something great.  He had a gift for thinking outside the box and believing anything is possible.  This can apply to all professions and endeavors.  He had a reputation of being both charming and difficult at times (perhaps even ruthless). But above all, he had a passion for what he believed. The irony is how his death has brought him even more to life. As a financial planner, it is my hope that Steve Jobs’ life will inspire us all to reflect upon ourselves, our goals, our beliefs and our passions. It really is the core of financial planning: What do you want to do with your life and how are you going to make it happen?

 Aley, Jim. “Steve Jobs, Who Built Worlds Most Valuable Technology Company, Dies at 56.“ Bloomberg 6 Oct. 2011

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