Warwick Valley Wealth Report

MAY  2012

The Markets:   

Some important news just happened over the weekend which will be effecting the global markets in the near future.

On Sunday, voters went to the polls in France, Greece, and Germany and the results could have a major impact on world markets. French voters sent incumbent president Nicholas Sarkozy packing and, instead, elected Socialist Party candidate Francois Hollande. Hollande "has pledged to shift the burden of economic hardship onto the rich and to resolve the protracted euro sovereign-debt crisis by softening the current prescription of austerity," according to The Wall Street Journal. While his strategy is debatable, it will likely cause a rift with Germany and add uncertainty to recent eurozone agreements.

Greek voters also went to the polls and "delivered a stinging rejection of the two incumbent parties, with many people casting ballots for smaller, far-left and far-right parties," according to the The Wall Street Journal. This, too, will likely result in more political and economic uncertainty. And in Germany, incumbent Angela Merkel's party suffered some setbacks in state elections.

What's leading to all the angst in Europe? Here are three things:

1. Recession fears - 11 European countries have now experienced two consecutive quarters of economic contraction.
2. Unemployment fears - the unemployment rate across the eurozone is at a record high.
3. Business confidence fears - April's read on the manufacturing PMI for the eurozone - a measure of confidence among businesses - fell to the lowest since June 2009.

Sources: MarketWatch, The Guardian

The bottom line is citizens are voting for change, but "political realities will complicate even more what is an already delicate economic and financial outlook for Europe, the world's largest economic area," according to Mohamed El-Arian, CEO and Co-CIO of PIMCO

These elections show that the economic crisis that began in 2008 is still rippling throughout the world.

Did You Know?

As we move toward summer, we are once again reminded of the familiar market adage "Sell in May and go away," and the uncanny historical bias with which it is substantiated. Typically, conjecture doesn't mature into adage without basis in reality, and market seasonality is just such an example as it has an impressive trend in terms of magnitude, consistency and longevity. We've discussed seasonality many times over the years and as we enter another of those seasonally biased periods (May through October) we want to revisit the subject in this month's newsletter.

Years ago we began using the reference tool, Stock Trader's Almanac, published by Yale Hirsch, and for years this has been a fantastic source of information on the stock market, so we always order a number of copies for the office each year (If you would like a copy you can visit www.stocktradersalmanac.com). The premise of their "Market Seasonality" study is essentially that, historically speaking, the market performs far better during the November through April time period than it does from May through October. On its own, that isn't a particularly profound statement or a particularly bold assertion, but when we examine the magnitude with which this effect has been chronicled over the years it becomes a very significant underpinning indeed. Consider this, if you were to invest $10,000 in the Dow Jones on May 1st and sell it on October 31st each year since 1950, you have lost money over the last 62 years! Put another way, the entire growth of the Dow Industrials since 1950 has effectively come in the "good" six months of the year.

It is also interesting to note that on a compounded basis, a theoretical $10,000 initial investment in 1950 is actually now down during the May 1-October 31 period using data thru Oct. 31, 2011. On the other hand, in looking at the seasonally strong period between November 1 and April 30 each year, an identical $10,000 initial investment grew to $702,292 at an average annual rate of 7.10% on a compounded basis.

Again, this study is not the end-all for risk management, but the study is very interesting and does expose a bias within the market that many investors are not aware of.  Investors will want to keep a close eye on the market right now and be sure the game plan is in place to adapt to any potential changes.

Challenge Corner

Riddle:

I begin and end with the letter 'e'
Have eight letters, but just one letter within me.

answer at the bottom

Wine of the Month

Sipping Sauvignon Blanc in the Spring

If there ever was a perfect pairing between a wine and a season, it would be Sauvignon Blanc in the Spring. Like Spring, Sauvignon Blanc is crisp, lively and refreshing. It is the perfect afternoons treat after a morning of yard work. You can easily picture yourself enjoying a glass on a porch or on a picnic overlooking the fields.

Though Sauvignon Blanc is produced all over the world, one of our favorite bottles is produced in Napa Valley by St Supery. All of the fruit is harvested from their certified sustainable vineyard and it is simply gorgeous. The nose and palate include beautiful notes of grapefruit, lime and fresh cut hay. The wine is dry and crisp with perfect balance between the acidity and fruit. A mouth watering effort not to be missed!

So, go out and get yourself a bottle of the 2010 St Supery Sauvignon Blanc and sip your way through the Spring!

Courtesy of David from The Old Vine, Inc. www.theoldvine.com

answer to trivia : Envelope

Best regards,

Warwick Valley Financial Advisors

Your local resource for trusted financial guidance