$4 Gasoline Has Negative Impact On Confidence And Retail Sales

The recent rise in oil prices and subsequent increase to near $4 per gallon for regular unleaded gasoline is likely to negatively impact consumer confidence and retail sales. The below chart shows the negative influence increasing gasoline prices (inverted on chart) has on consumer confidence.

From The Blog of HORAN Capital Advisors

The negative impact on confidence also negatively impacts retail sales when gasoline reaches $4 per gallon. Note, gasoline prices lead retail sales by one month in the below chart.

From The Blog of HORAN Capital Advisors

Lastly, as noted in an earlier post, declining confidence often translates into weaker equity prices.

From The Blog of HORAN Capital Advisors

Volatile Equity Market Returns

Absent the significant market contraction in 2008/2009, both the Dow and S&P 500 Index have generated decent returns. For investors though, the equity market pullback during the financial crisis period of '08/'09 remains top of mind. As the below tables show, the year over year returns for these two indices have been pretty strong resulting in 3-year annualized returns in the mid-teens. Unfortunately, the significant decline during the financial crisis has resulted in no return over the four and five year time period.


The Chart of the Day puts this most recent rally in perspective in their below commentary and chart.

"The Dow made another post-financial crisis rally high Thursday as it approached the 13,000 level. To provide some perspective to the current Dow rally that began back in early October 2011, all major market rallies of the last 111 years are plotted on today's chart. Each dot represents a major stock market rally as measured by the Dow. As today's chart illustrates, the Dow has begun a major rally 28 times over the past 111 years which equates to an average of one rally every four years. Also, most major rallies (78%) resulted in a gain of between 30% and 150% (29.8% to 150.5% to be exact) and lasted between 200 and 800 trading days (9.5 months to 3.2 years) -- highlighted in today's chart with a light blue shaded box. As it stands right now, the current Dow rally (hollow blue dot labeled you are here) would be classified as well below average in both duration and magnitude."

Source: Chart of the Day

At HORAN Capital Advisors, we believe this heightened volatility is likely to represent the return pattern for investors for the foreseeable future. As such we believe it is important for investors to incorporate a high quality portfolio for their core equity investments. Additionally, making use of so called alternative investments that potentially minimizes downside returns is equally important.

Pick Your Strategist/Advisor Carefully

The below chart was provided by the Wall Street Journal courtesy of Doug Kass.

Congress Desires To Eliminate Tax Deferral Option Of Inherited IRAs

In Congress' effort to continue transportation funding, Senate Finance Chairman Max Baucus (D., Mont.) has recommended the bill include a provision limiting the tax deferral options of inherited IRAs unless the IRAs have been converted to a Roth. In simple terms, currently, inherited IRA beneficiaries are able to withdrawal funds over the beneficiary's life expectancy. Beginning in 2013, the proposed legislation would require most non-spouse inheritors of traditional IRAs to withdraw the entire amount from a traditional IRA within five years. There are a few exceptions that are detailed in a recent Forbes article, Congress May Crush Key Tool For IRA Inheritors. The Forbes article notes, "Let’s hope there’s enough of a public outcry that this legislation doesn’t pass. If it does, owners of traditional IRAs will have one more reason to convert them to Roth accounts. The mark up legislation can be viewed at this link (PDF).

January A Risk On Month

As we noted in our fourth quarter investor letter, the new phrase repeated throughout 2011 was “risk on/risk off,” simply defined as buying riskier investments during positive market moves and selling riskier investments during downward moving equity markets. “Risk on” assets include stocks, commodities and high-yield bonds; whereas “risk off” assets include cash, U.S. treasuries and gold. Specifically, in a "risk on" environment, stocks that have higher betas tend to be favored by investors. Higher quality dividend paying stocks tend to move out of favor during these "risk on" phases relative to the higher beta investments.

January was certainly a case in point where "risk on" was the operative strategy. In January the average return for dividend payers in the S&P 500 Index trailed the non payers by 3.30 percentage points.

Source: Standard & Poor's

Additionally, Bespoke Investment Group noted recently the outperformance in January of the underperformers from 2011.

Presidential Election Year Stock Market Return

More times than not, in a presidential election year the stock market has had better performance when the incumbent party wins. As noted in a recent T. Rowe Price report, "the S&P 500 Index has risen in 12 of the 16 election years since World War II. While that’s about the same percentage of all up years in that time, the index had an average gain of 9.2% when the incumbent party won and just 2.2% when it lost, according to Ned Davis Research." The report also notes that the market has declined in two of the last three presidential election years.

From The Blog of HORAN Capital Advisors

Source:

The Stock Market In Presidential Election Years (page 7)
T. Rowe Price Report
Winter 2012
http://individual.troweprice.com/public/Retail/xStaticFiles/Winter2012PriceReport.pdf

Milton Friedman On Capitalism 32 Years Ago

A two minute excerpt from a 1979 Phil Donahue show where Milton Friedman talks about capitalism and socialism.

Labor Market Only Marginally Better

Although the equity market liked the employment report this morning, the labor market is far from where it needs to be to absorb the jobs lost since the last recession. The 243,000 jobs that were added was the highest in the last nine months; however, the number of employed is far below the level prior to the recession--5.6 million below.

From The Blog of HORAN Capital Advisors

Certainly the addition of 200,000+ new jobs is a positive, but this recovery remains one of the weaker recoveries in terms of job creation. The participation rate remains at a level last reached more than 20 years ago. The employment to population ratio and the average duration of unemployment also remain at problematic levels.

From The Blog of HORAN Capital Advisors