Gold and commodities, oh my.

With The Final Four and The Masters here in Georgia and only a week apart there has been no shortage of excitement for sports fans here.

Speaking of excitement, this week the markets have provided it in spades.  The Dow Jones dropped 265 points on Monday, rallied 157 points on Tuesday and then fell 138 points on Wednesday.  Commodities have had an even tougher time with Silver falling by over 12% on Monday alone, while Gold fell 8.7%.  As I said in my last update, the first quarter of 2013 was very similar to the first quarter in 2012 with the stock market rallying while experiencing very little volatility.  But April was a turning point in 2012 and in previous years with market volatility increasing and stocks falling. We are certainly keeping a close eye on recent developments to see if the volatility experienced this week continues or is just a blip in the market’s march higher.   
The Wall Street Journal posted an article that addresses the recent decline in Gold, while also pointing out that the unprecedented amount of financial stimulus by governments across the globe is currently the single biggest driver of the markets.  We agree with this conclusion and I encourage you to check out this short article. 
From the Wall Street Journal:

“Investing in a Fed-supported market is difficult, and so far, thoughtful investors may have over-thought things. They have underestimated the Fed’s power.

That leaves investors with two things to watch for: serious, nearby economic problems or an end to Fed support. Neither seems to happening yet. Although the world economy still is not able to function without massive government aid, it is getting plenty of that and is not currently in a crisis. That may be the single most important fact about financial markets now.”

Click to read more:

March Madness

In my family, March Madness is our favorite time of the year. My wife typically makes a delicious basketball cake in early March for me and the boys. Both of my boys completed a bracket this year and are faring better than I am, something my youngest is reminding me of on a daily basis.
In the spirit of March Madness, here is a graphic that depicts how the stock/bond markets are impacted by different variables:
stocks sweet sixteen

The first quarter was very strong for the stock market with healthy gains and low volatility, almost a carbon copy of the first quarter last year.  The S&P 500 and the Dow led the way while bonds and gold struggled.  In 2010, 2011 and 2012, the US stock market peaked during one of the four weeks of April.  In each case economic momentum slowed down, fears from Europe resumed and a stock market correction of between 10 and 19% ensued. That being said, 2013 is a different year and the massive amount of money being printed by central banks across the globe could help keep any market pullbacks shallow.

In recent weeks I have repeatedly been asked if investors in the United States should be concerned about the economic unrest in Cyprus. If you have not been paying attention here are two articles that discuss the situation in Cyprus:
Cyprus is a tiny country, but in this particular case the response from the European Central Bank to Cyprus’ request for bailout funds is why an investor needs to pay attention to what is going on.  In the recent past, banks in Greece, Spain, France, Portugal have called upon the European Central Bank(ECB) for bailout funds.  But for the first time the ECB has demanded a one-time tax on individual bank deposits in return for the bailout money Cyprus requsted.  Up until this point bank deposits in Europe have been insured, much like FDIC insurance here in the United States.  
Now that the ECB has put seizing individuals bank deposits on the table as a prerequisite for bailout money the question is will the public’s trust in the banking system in countries like Italy, Spain and France begin to decline.  If so, the public could begin to withdraw their funds from local banks en masse and the European crisis could come back into focus. I am not predicting what will happen, and if history is any indication the ECB may come up with another temporary “solution” (shorter-term stopgap) that tries to contain any fall-out from the Cyprus debacle.  We will continue to monitor this situation very carefully.