Schwartz Financial Weekly Commentary 2/17/14

Schwartz Financial Weekly Commentary

February 17, 2014


The Markets

With the enthusiasm of new love, American stock markets pushed higher during Valentine’s week.


Were investors enamored of the Federal Reserve’s new Chairwoman, Janet Yellen, who spoke on behalf of the Fed for the first time last week? Some suggested investors appreciated her dedication – she spent almost six hours answering questions from members of the Financial Services Committee – and were soothed by her commitment to continuing the policies of her predecessor. The New York Times said stock markets rose as a result of Ms. Yellen’s testimony and were further buoyed when the House voted to raise the government’s borrowing limit until March 2015 without any conditions.


Perhaps investors saw the good in employment numbers that were released recently. An analyst quoted in Barron’s said the American labor market “just might be tighter than most of us expected.” His argument was while long-term unemployment remains high, “…2.5 percent, higher than peaks seen in prior recessions, and much worse than the 50-year average of 1.1 percent,” the short-term jobless rate (measuring people who are out of work briefly) is 4.2 percent which is below the 50-year average of 5 percent. The article shared the thoughts of another expert, Michael Darda of MKM Partners:


“If our job market can mend even when gross domestic product (GDP) growth averaged a lousy 2.4%, what happens if growth picks up? Last week, Treasury data showed the federal fiscal deficit shrinking to just 3% of GDP from more than 10% four years ago thanks to higher taxes and restrained government spending. At this pace, our budget deficit could fall to zero next year, and we could run a surplus by 2016.”


Tarnishing this shiny outlook is the fact 36 percent of Americans who want a job and can’t find one have been unemployed for more than 27 weeks.


Maybe it was an unrequited desire for better weather. Huge swathes of the United States have been gripped by snow, ice storms, and freezing weather which suggested caused many investors to discount weak economic reports in the belief consumer spending and the company performance might have been stronger if weather conditions had been more favorable.


Data as of 2/14/14
Standard & Poor’s 500 (Domestic Stocks)
10-year Treasury Note (Yield Only)
Gold (per ounce)
DJ-UBS Commodity Index
DJ Equity All REIT TR Index

Notes: S&P 500, Gold, DJ-UBS 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 TR 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,, 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.


How many hours do you work each week? It’s a topic that has garnered significant interest for some time. In 1930, British economist John Maynard Keynes wrote:


“For many ages to come the old Adam will be so strong in us that everybody will need to do some work if he is to be contented. We shall do more things for ourselves than is usual with the rich to-day, only too glad to have small duties and tasks and routines. But beyond this, we shall endeavor to spread the bread thin on the butter – to make what work there is still to be done to be as widely shared as possible. Three-hour shifts or a fifteen-hour week may put off the problem for a great while. For three hours a day is quite enough to satisfy the old Adam in most of us!”


If you’re a hard-driving, competitive person who logs well over 40 hours of work each week in pursuit of higher earnings, plum promotions, and peer respect, Keynes’ predictions may be mystifying, not to mention unrealized.


While it’s true that Keynes’ expectations for the future haven’t panned out (he also anticipated accumulation of wealth would lose social importance resulting in a changed moral code), the average work week did get shorter in many developed countries between 1990 and 2012. It’s interesting to note, as The Economist pointed out, more productive and better-paid workers often put in less time at the office. The publication offered this example:


“The Greeks are some of the most hardworking in the OECD (Organization for Economic Cooperation and Development), putting in over 2,000 hours a year on average. Germans, on the other hand, are comparative slackers, working about 1,400 hours each year. But German productivity is about 70% higher.”


When it comes to hours worked, America is an aberration relative to other developed nations. We’re highly productive and we tend to work longer hours.


Weekly Focus – Think About It


I do not want to foresee the future. I am concerned with taking care of the present. God has given me no control over the moment following.”

–Mahatma Gandhi, a leader of India’s independence movement

Value vs. Growth Investing (2/14/14)


 ©2004 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) is not warranted to be accurate, complete or timely. Morningstar is not responsible for any damages or losses arising from any use of this information and has not granted its consent to be considered or deemed an “expert” under the Securities Act of 1933. Past performance is no guarantee of future results.  Indices are unmanaged and while these indices can be invested in directly, this is neither a recommendation nor an offer to purchase.  This can only be done by prospectus and should be on the recommendation of a licensed professional.


Office Notes:


Early 2014 Volatility


You may know by now that the markets have had a turbulent year so far. If you pay much attention to the financial media, you might have heard the term “market correction” being tossed around and wondered what it meant. More to the point, you may be asking yourself what’s causing all the volatility we’ve experienced lately. This letter has the answers.


First off, market corrections. A correction is defined as “a reverse movement, usually negative, of at least 10% in a stock, bond, commodity, or index.”1 In other words, whenever the stock market drops 10% or more, you can feel pretty confident that we’re in the midst of a correction.


If the market continues to drop for a long period of time, then the correction becomes a bear market.


People often ask me, “Why do we have market corrections anyway? Are they inevitable, or just self-fulfilling prophecy?” The truth is that they can be a bit of both. Corrections are inevitable in that the markets can’t always be on the rise. Something will always happen, sometime, somewhere, that causes people to sell their investments.


On the other hand, corrections can often have a tinge of self-fulfilling prophecy to them as well.  When enough people start predicting an inevitable correction, investors will sell at the first sign of bad news, thinking, “This is it, this is the correction we’ve been waiting for.” Unnerved, this prompts more investors to sell. The whole thing takes on a kind of domino effect, with too many people forgetting that it was the fear of a correction that largely incited the correction in the first place.


To be clear, as of this writing we are not yet technically in a correction. As of February 6th, the S&P 500® has dropped 4.05% from where it closed on December 31st, 2013.2 The Dow®, meanwhile, has fallen 5.72%.3 So there’s still a ways to go before we see that 10% number I mentioned earlier. Still, last month was the worst January since 2009.4 What’s behind the slide?


Several things, actually. There’s no one big piece of economic news or data causing the markets to dip, but a combination of factors that have many investors feeling jittery. Here’s a quick rundown.


Emerging Markets


The term “emerging markets” is Wall Street-speak for countries with less developed markets than some of the traditional economic powers like the United States and Western Europe. It’s a little misleading, as there’s no guarantee an emerging market will continue to advance. In fact, some countries have been labeled “emerging markets” for years. Regardless, investing in emerging markets can be a tantalizing prospect because of the possibility for growth. As a whole, emerging markets have had a good past couple of years, but 2013 wasn’t kind to many of them. So far, 2014 has been even worse. Many of these countries have seen their economic

growth slow considerably. Even worse, some of the larger emerging markets, like Brazil, India, and Turkey, are having major currency problems. The low interest rates in the U.S. have benefited these countries because they’ve led to an influx of foreign capital. But recent actions by the Federal Reserve mean interest rates are likely to rise. The result is that foreign investment is drying up, which weakens their currency and slows their growth.


So why do emerging markets impact us here at home? Because of one basic fact: there are almost 200 different countries in the world, but they all share, suffer, and benefit from the same global economy. What the Federal Reserve does affects people in Turkey. What Turkey does affects markets here in the United States. And trouble in emerging markets, in large part, has led to the volatility in our own.


The United States


Meanwhile, the US has its own worries. Again, there’s no one big piece of news dragging the markets down. It’s really more about a few nagging fears. For example, as I alluded to earlier, the Federal Reserve is very much in the spotlight thanks to its decision to wind down its stimulus program. For years now, the Federal Reserve has been buying up bonds at a massive rate,

something which has kept interest rates low and acted as a prop for the  economy. Many people worry about what will happen now that the prop is being taken away. Other worries? Weak manufacturing numbers and mediocre jobs reports have some wondering whether we’re facing a

slowdown of our own economy (which was already slow to begin with.)


Now with all that said, here’s the good news. Last year was a fantastic one for the markets, especially stocks. The Dow rose 26.5% in 2013. The S&P 500 rose 29.6%.4 It would take quite a lot for any correction to erase those kinds of returns. And overall, the U.S. economy is still improving. That’s why the Fed finally decided to cut-back on their stimulus program in the first

place. But the best news is that a correction—if it happens—can actually be a good thing. Why? Because it creates opportunities. As more panicky, short-term investors sell, the price of some of the best companies in the world goes down. That creates a window to buy into these companies at bargain prices. So a correction can actually be seen as healthy if you take a long-term approach to investing.


And that brings me to the entire point of this letter. As you know, a long-term approach is the key. Not too long ago, the sun was shining. It’s cloudy right now, but storms always pass eventually. Overreacting to a month or two of volatility is like downing an entire bottle of antacids to cure a mild case of heartburn. It’ll only make you feel worse in the end.


So here’s the way we’re going to react. My team and I are always evaluating the state of our client’s portfolios. If we feel the need to recommend any changes, or move to higher ground, we’ll certainly let them know. But in the meantime, we believe in the investments in their portfolios for a reason: because they’re what will help you reach your long-term goals. We still think that to be the case. While a correction might be uncomfortable, it will pass … and potentially bring new opportunities with it.


In the meantime, we’re here for you if you have any questions or concerns. Please feel free to give me a call at 215-886-2122. I’m always happy to talk to you!




Michael L. Schwartz, RFC®, CWS®, CFS


P.S.  Please feel free to forward this commentary to family, friends, or colleagues.  If you would like us to add them to the list, please reply to this email with their email address and we will ask for their permission to be added. 


Michael L. Schwartz, RFC®, CWS®, CFS, offers securities and advisory services through Independent Financial Group, LLC., A Registered Broker/Dealer,  Member FINRA-SIPC.  Independent Financial Group, LLC and Schwartz Financial are separate entities.


This information is provided for informational purposes only and is not a solicitation or recommendation that any particular investor should purchase or sell any security. The information contained herein is obtained from sources believed to be reliable but its accuracy or completeness is not guaranteed.  Any opinions expressed herein are subject to change without notice.  An Index is a composite of securities that provides a performance benchmark.  Returns are presented for illustrative purposes only and are not intended to project the performance of any specific investment.  Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly.  Past performance is not a guarantee of future results.


* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.


* The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices. 


* 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 London afternoon gold price fix as reported by the London Bullion Market Association.


* The DJ 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 TR 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.


* Past performance does not guarantee future results.


* You cannot invest directly in an index.


* Consult your financial professional before making any investment decision.


* To unsubscribe from our “market commentary” please reply to this e-mail with    “Unsubscribe” in the subject line, or write us at “”.

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