Peek of the Week
May 31, 2016
The Markets
Everyone makes mistakes. Some people learn from them.
In GMO’s March 2016 white paper, James Montier and Philip Pilkington
continued to explore the Federal Reserve’s influence on the stock market. It was
a process they’d begun in 2015 as they sought “…to understand why our forecast
for the S&P 500 had been too pessimistic over the last two decades or so.” Inspired
by research done at the New York Federal Reserve, they found:
“…sometime around 1985
the market really started to react to FOMC [Federal Open Market Committee] days.
Like the Fed economists, we found that for the past 30 or so years these
announcement days have had a major, and increasing, impact on the stock market…In
fact, FOMC days account for 25 percent of the total real returns we have
witnessed since 1984!”
Upon further examination,
they realized the Fed’s influence on the Standard & Poor’s 500 Index (S&P
500) wasn’t caused by monetary policy decisions. Markets moved just because the
committee was meeting. Investor sentiment was driving market action.
Last week, Federal Reserve
Chair Janet Yellen commented, “It's appropriate, and I've said this in the
past, I think for the Fed to gradually and cautiously increase our overnight
interest rate over time and probably in the coming months, such a move would be
appropriate.” Her comments did not inspire ‘animal spirits,’ which is how economist
John Maynard Keynes described the emotions that motivate people to act.
At the end of the week, the
Dow Jones Industrial Average and the S&P 500 were higher on solid economic
data that included an upward revision of first quarter’s gross domestic product
(GDP) growth rate. GDP is the value of all goods and services produced in the
United States during a given period.
The next FOMC meeting is June
14-15.
Data as of 5/27/16
|
1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
|
Standard &
Poor's 500 (Domestic Stocks)
|
2.3%
|
2.7%
|
-1.2%
|
8.1%
|
9.5%
|
5.2%
|
Dow Jones Global
ex-U.S.
|
2.1
|
-0.7
|
-13.8
|
-1.7
|
-1.6
|
-0.3
|
10-year Treasury
Note (Yield Only)
|
1.9
|
NA
|
2.1
|
2.1
|
3.1
|
5.1
|
Gold (per ounce)
|
-3.0
|
14.5
|
2.6
|
-4.0
|
-4.5
|
6.3
|
Bloomberg Commodity Index
|
0.7
|
8.8
|
-14.5
|
-14.0
|
-12.4
|
-7.1
|
DJ Equity All REIT Total Return Index
|
2.0
|
6.6
|
10.0
|
8.4
|
10.7
|
7.3
|
S&P 500, Dow Jones Global ex-US, Gold, Bloomberg 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 Total
Return 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.
chief executive officer compensation is down. no, it’s up. You
better judge for yourself. The New York Times reported the 200 most-highly-paid CEOs in the United States
collectively experienced a pay cut last year! CEOs’ average compensation – all CEOs compensation added together and
then divided by 200 – fell by 15 percent from 2014 to 2015.
Of course, you know what they
say about lies and statistics.
Equilar, the
company responsible for the study, reported CEO pay grew modestly in 2015. They
looked at median CEO pay – the number
in the middle. It was $16.6 million for fiscal 2015. That’s up 5 percent from
the previous year.
No matter how you interpret
the results, not one CEO earned more than $100 million. CEOs in the technology
industry had the highest median pay while those in basic materials (which
includes oil and gas companies) had the lowest, according to Equilar.
Many people have argued
company performance should inform CEO pay, but there wasn’t much evidence this
was the case. Although there may have been a basis for CEO pay changes, there
was no clear correlation to shareholder returns or company revenues. For
instance:
·
A 702 percent
increase in pay was awarded when total shareholder return was down 5 percent,
and company revenues were down 1 percent.
·
A 286 percent
increase in pay was awarded when total shareholder return was up 16 percent,
and company revenues were up 9 percent.
·
A 48 percent
reduction in pay occurred when total shareholder return was up 25 percent, and
company revenues were up 4 percent.
The portion of 2015 corporate
budgets allotted to pay hikes for employees increased by 2.8 percent, on
average, according to Mercer. The
report said, “…the highest-performing employees received average base pay
increases of 4.8 percent in 2015 compared to 2.7 percent for average performers
and 0.2 percent for the lowest performers…”
Weekly Focus –
Think About It
“Mistakes
are a part of being human. Appreciate your mistakes for what they are: precious
life lessons that can only be learned the hard way. Unless it's a fatal
mistake, which, at least, others can learn from.”
--Al Franken, U.S. Senator and comedian
Best
regards,
Leif M. Hagen
Leif M. Hagen, CLU, ChFC
LP Financial Advisor
Securities offered through LPL Financial Inc., Member FINRA/SIPC.
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* 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. You cannot invest directly in this index.
* The Standard &
Poor’s 500 (S&P 500) is an unmanaged index. Unmanaged index returns do not
reflect fees,
expenses, or sales
charges. Index performance is not indicative of the performance of any investment.
* 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 afternoon gold price as reported by the London Bullion Market Association.
The gold price is
set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is
expressed in U.S. dollars per fine troy ounce.
* The Bloomberg
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 Total Return 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.
* Economic forecasts
set forth may not develop as predicted and there can be no guarantee that
strategies promoted will be successful.
* Past performance
does not guarantee future results. Investing involves risk, including loss of
principal.
* You cannot invest
directly in an index.
* Consult your
financial professional before making any investment decision.
* Stock investing
involves risk including loss of principal.
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Sources:
https://www.gmo.com/docs/default-source/research-and-commentary/strategies/asset-allocation/the-stock-market-as-monetary-policy-junkie-quantifying-the-fed's-impact-on-the-s-p-500.pdf?sfvrsn=3 (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/05-31-16_GMO-The_Stock_Market_as_Monetary_Policy_Junkie_Quantifying_the_Feds_Impact_on_the_S_and_P_500-Footnote_1.pdf)
http://www.barrons.com/articles/stocks-surge-over-2-on-strong-economic-data-1464409117?mod=BOL_hp_we_columns (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/05-31-16_Barrons-Stocks_Surge_Over_2_Percent_on_Strong_Economic_Data-Footnote_4.pdf)
http://www.economist.com/blogs/graphicdetail/2012/02/focus-0 (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/05-31-16_TheEconomist-Executive_Pay_and_Performance-Footnote_8.pdf)
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