« back to News section

January 16, 2007

The Markets

The Bulls took the market averages up last week pushing the Dow Jones Industrial Average to a new record close. The stock market turned in its best performance in months last week, with all averages advancing and some indexes up to their best levels since early 2001.

It was a week characterized by surprising economic news. According to Barron’s, the U.S. trade balance—the difference between the value of goods we export and goods we import— improved unexpectedly. Although we still have a deficit (meaning that we import more than we export), the gap narrowed during November. The early earnings results have exceeded forecasts and Friday’s Commerce Department data showed retail sales up a surprising 0.9%. That is a likely reflection of the increased use of ‘gift cards’, which are extending the holiday spending season.

The big news was the stunning drop in crude oil prices. They fell below $52 on Thursday and we await a similar drop for gasoline that will free up funds for more consumers spending. The heating bills for the New York area will also show a large drop with the recent unseasonable weather.

ALL OF THE STOCKS IN AN INDEX DON’T CONTRIBUTE equally to its performance. In market-value weighted indexes, like the Standard & Poor’s 500, the larger a company’s market value (its share price times the number of shares outstanding), the greater its influence on the index. Imagine that an index has a market capitalization of $100 million, and that one company in that index has a market capitalization of $10 million. Then that company would make up 10% of the index, and its return would be more heavily weighted than the return of a smaller company.

Consider the influence of Exxon Mobil and Citigroup on the S&P 500 Index last year. The S&P 500 Index returned about 16% during 2006. According to Standard & Poor’s, Exxon Mobil Corp. was 3.51% of the capitalization of the S&P 500 Index and provided a 39% return, significantly outperforming the index itself. Citigroup, which accounted for 2.15% of the capitalization of the index, returned 19.06% in 2006. It’s important to understand that sometimes just a few companies’ stocks can be responsible for a large portion of an index’s return.

BACK TO BASICS: DIVERSIFY, DIVERSIFY, DIVERSIFY. When you look at the returns posted by indexes like the Standard & Poor’s 500 and the Dow Jones Industrial Average, you may be asking yourself why you weren’t invested 100% in stocks last year. This type of second guessing is akin to market timing. If you had been 100% invested in stocks, mirroring the Dow, your portfolio would have given back all of its gains mid-year, and you wouldn’t have been pleased. When the stock or bond market has a good year, it’s tempting to wish that you were invested in a single asset class, but it’s not a sound approach to investing. Diversification can help lower the volatility of your portfolio and potentially improve returns for conservative investors.

Make your dreams reality.

He was the youngest person ever awarded the Nobel Peace Prize. He was named Man of the Year by Time magazine in 1963. He was the most recognized leader of the American civil rights movement. No matter who pays tribute to Dr. Martin Luther King, or what words they use to describe his inspirational work promoting nonviolence and equality for all races, Dr. King has always said it better than anyone else:

“I refuse to accept the view that mankind is so tragically bound to the starless midnight of racism and war that the bright daybreak of peace and brotherhood can never become reality. I believe that unarmed truth and unconditional love will have the final word.”

Dr. King has taught millions that every individual has the right to pursue happiness and the power to provoke change. Dreams can come true—you just have to believe and take action. As always, we’re here to help you make your financial dreams come true.

There are 3 gentlemen in a meeting: Mr. Yellow, Mr. Green and Mr. Brown. They are wearing yellow, green and brown ties. Mr. Yellow says: "Did you notice that the color of our ties are different from our names?" The person who is wearing the green tie says, "Yes, you are right!"

Do you know who is wearing what color of tie? Click here to view the answer.

Best Regards,

* 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 Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks.
* The Nasdaq Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.