Permanent Value

Weekly Update: May 17- 21, 2010

Michael La Salle
May 21st, 2010

Stocks Lower as Fear Index Soars

Stocks closed lower this week as volatility continues to be an issue.  Worries over the situation in Europe and the potential effect it could have on the global economy dragged stocks down as the S&P 500 lost 4.23% and the Dow Jones Industrial Average was down 4.02% on the week.  The Chicago Board Options Exchange Volatility Index, or VIX, jumped 30% on the week, indicating a large amount of fear in the markets.

In economic news, inflation came in better than expected as the Producer Price Index was down 0.1% month over month, compared to expectations of a rise of 0.1% in April.  The Consumer Price Index also dropped by 0.1% in April, coming in lower than the projection of flat inflation for the month.  Disappointing unemployment numbers came on Thursday as initial jobless claims jumped to 471,000 this week.  Expectations were set to lower to 440,000.

In earnings news, home improvement retailers, Home Depot, Inc. and Lowe’s Companies, Inc. both reported better than expected earnings this week.  Home Depot posted earnings of 45 cents per share, 12.5% higher than expectations, while Lowe’s came in 9.68% better than expectations after posting earnings of 34 cents per share.  Technology giants Dell, Inc. also beat analysts’ expectations of 27 cents per share by posting earnings of 30 cents per share. 

What opportunities are ahead?

Over the past three weeks we have seen a large amount of volatility in the market.  We have seen a lot of down days, but also quite a few very large up days.  With the current market environment, it looks more like we are coming out of a correction in the market than a full on bear market.

In these times of uncertainty, it is very easy to sell out of equities and flee to a safer area of the market like bonds or even cash.  As we have seen, by moving a large portion of your portfolio to bonds or cash, you are limiting your upside potential substantially.  The use of high quality, high yielding stocks can give you the protection of income, but still give you the market exposure to realize some capital appreciation.

In current market conditions, the average money market is paying about 0.75% interest and a one-year certificate of deposit is paying about 1% interest with no capital appreciation.  With inflation at about 2.5%, you are actually losing buying power by having your money in these instruments.  With many strong dividend yielding companies paying up to 6%, the dividends alone are outpacing inflation, and of course you still get the benefit of possible capital appreciation.

The utilities and telecom sectors generally have the highest dividend yields, averaging anywhere from 4% to 6%.  Although these sectors have higher yields, they have a lower growth potential than that of the energy sector that pays about 3% on average.  So with a little diversification it is possible to incorporate a few sectors to push the yield a little higher, and keep the exposure to growth.

Market Returns

  This Week Year to Date Last Year Last 5 Years
S&P 500 -4.23% -2.46% 22.44% -8.54%
Dow Jones Industrial Average -4.02% -2.25% 22.93% -2.66%


Next Week’s Economic Releases

May 24 – Existing Home Sales

May 25 – Consumer Confidence

May 26 – Durable Goods Orders, New Home Sales

May 27 – Gross Domestic Product, Jobless Claims

May 28 – Personal Incomes and Outlays, Consumer Sentiment