Five years can be transformative. It’s ample time to challenge old beliefs, create new ones, and remind investors that factors like luck and skill play a significant role in outcomes. Below, we present the annualized returns for various major asset classes over the past five years, concluding with some insightful observations.
Does he genuinely believe that asset prices play a vital role in shaping monetary policy? After listening to the talk delivered by Timothy Geithner, President of the New York Fed, at the New York Association for Business Economics, one might be left pondering. Throughout his address, he oscillated between endorsing and distancing himself from the significance of asset prices as a tool for determining interest rates.
The stock market has sprinted into 2006 with impressive momentum. As of January 10, the S&P 500—a preferred benchmark for large-cap stocks—has risen 3.3% in price. Notably, small caps continue to thrive, with the S&P 600 showing an even more substantial year-to-date increase of 5.3%.
What’s driving equity returns this early in 2006? The answer aligns with recent trends in the performance of the 10 sectors that make up the S&P 500 and S&P 600. Energy is once again at the forefront, consistently leading the sector performance over the past several years. The graphs below demonstrate that energy stocks top the rankings within both large- and small-cap categories.
Much like the fabled canary in the coal mine, early signs of change can often be subtle and easily misread. With that in mind, we should be cautious about over-interpreting the recent news from the Fed regarding a decline in consumer credit for the second consecutive month in November, as evidenced by the chart below. This October/November dip marks the first back-to-back monthly drop since 1992.
…..COULD THIS DECLINE BE SIGNIFICANT?
Ben Bernanke’s upcoming tenure, succeeding Alan Greenspan at the Fed, could be aptly described as a baptism by fire.
As 2006 progresses, the central bank’s primary concern, the dollar, increasingly appears to be under pressure. As of last Friday’s close, the U.S. Dollar Index had fallen by 3.9% from recent highs set in November, with a significant portion of that loss occurring last week. Compounding the issue, gold prices are surging, reaching levels not seen in 25 years.
M3, the broadest measure of money supply currently reported by the Federal Reserve, is on the verge of being phased out. “Currently” is the key term here, as updates to M3 will cease in March.
Though its days are numbered, M3 is showing signs of one final surge. The latest weekly money supply data indicates that M3 advanced by 8.1% for the week ending December 26, 2005, compared to the previous year. In contrast, the narrower measure known as M2 grew by only 4.1% during the same period. This growing disparity is noteworthy, suggesting the central bank may not fully acknowledge differences between M2 and M3.
The real estate market could play a pivotal role in the economy throughout 2006, regardless of whether it’s deemed a bubble.
Some analysts believe this year could be critical for Joe Sixpack’s relationship with housing. In light of this, the Levy Economics Institute of Bard College has published a new analysis titled: Are Housing Prices, Household Debt, and Growth Sustainable?
Wall Street kicked off the new year with remarkable vigor. On January 3, the S&P 500 rose by 1.6%, and every sector within the index recorded gains. This uptick has propelled the S&P 500 closer to the peak values reached last month, which were the highest since 2001.
Optimism is thriving as we venture further into 2006. Yet, despite the initial enthusiasm, discussions about what lies ahead have intensified, making it increasingly challenging for investors to adopt a wait-and-see stance.
…..A MEASURE OF HOPE
Source: Stockcharts.com
The first energy crisis of 2006 was short-lived, but it may have implications.
Russia, the largest energy exporter outside the Middle East, disrupted New Year’s festivities in Ukraine by halting natural gas deliveries. After a series of negotiations, Moscow has resumed the supply, but not without casting doubt on its reliability as an exporter of crude and natural gas.
Source: Energy Information Administration
As the new year begins in the United States, it’s a time for reflection. We look back at the previous year to identify trends and patterns—hoping to glean insights for the future. Below are the total returns for 2005, thanks to data from Vestek Systems via Aronson+Johnson+Ortiz. While the future may hold uncertainties, the past offers clearer insights.
On this note, mid-cap stocks and REITs flourished in the U.S. last year, even as the conventional view suggested a correction was imminent for real estate equities. Notably, equities in emerging markets saw exceptional performance. Meanwhile, fixed-income investments appear to have sluggish returns, with even 90-day T-bills outperforming the venerable Dow Jones Industrials.
Now, let’s shift focus to what lies ahead. Happy New Year!
S&P 500 CAP WEIGHTED 4.92%
S&P MIDCAP CAP WEIGHTED 12.54%
S&P SMALLCAP CAP WEIGHTED 7.67%
S&P 500/CITIGROUP GROWTH 1.14%
S&P 500/CITIGROUP VALUE 8.74%
S&P REIT INDEX 11.30%
RUSSELL 1000 INDEX (large cap) 6.27%
RUSSELL MIDCAP INDEX 12.65%
RUSSELL 2000 INDEX (small cap) 4.52%
RUSSELL MICROCAP INDEX 2.56%
RUSSELL 1000 GROWTH INDEX 5.26%
RUSSELL 1000 VALUE INDEX 7.05%
RUSSELL MIDCAP GROWTH INDEX 12.10%
RUSSELL MIDCAP VALUE INDEX 12.64%
RUSSELL 2000 GROWTH INDEX 4.12%
RUSSELL 2000 VALUE INDEX 4.68%
DOW JONES INDUSTRIALS 1.72%
NASDAQ COMPOSITE (PRC CHG) 1.37%
MSCI WORLD EX US 14.89%
MSCI WORLD EX US GROWTH 14.55%
MSCI WORLD EX US VALUE 15.11%
MSCI EAFE 13.97%
MSCI EMERGING MARKETS 34.07%
VESTEK 90-DAY T-BILL INDEX 3.04%
VESTEK LONG TREASURY INDEX 5.70%
VESTEK BROAD BOND INDEX 2.61%
Source: Aronson+Johnson+Ortiz
As we venture further into the year, understanding market trends and economic indicators will be crucial. Both the historical context and emerging patterns will inform our investment strategies and outlooks. Staying informed and adaptable will play a vital role in navigating the complexities ahead.