Week of August 20, 2007

The Markets
 
We’re from the Federal Reserve and we’re here to help.

To dredge up an old cliché, “like a knight in shining armor,” the Federal Reserve swooped in last Friday with a shot of adrenaline—in the form of a cut in the discount rate—that pepped up the markets.  The discount rate is the interest rate charged to banks and other depository institutions that borrow money from the Federal Reserve.  For various reasons, it’s largely a symbolic rate since very few financial institutions actually borrow money in this manner.  However, that didn’t matter to the financial markets.  More importantly, this symbolic move led some analysts to believe that it may open the door to the Federal Reserve cutting the all-important federal funds rate in the near future, according to The Wall Street Journal.

The cut in the discount rate last Friday sparked a large rally in the stock market, which helped drive the Standard & Poor’s 500 index to its biggest one-day percentage gain in more than four years, according The Wall Street Journal.  Unfortunately, it wasn’t enough to offset losses earlier in the week.

At its lowest point last week, the Dow Jones Industrial Average was down more than 10%, a threshold that typically signifies a “correction.”  As Barron’s pointed out, the stock market was on a streak of 1,591 days without experiencing a 10% decline.  That was the second longest streak since World War II.  So the current decline is, if anything, overdue.

Data from Ned Davis Research helps put the current decline into even better perspective.  Their research shows that between 1/2/1900 and 6/28/2006, the Dow Jones Industrial Average declined 5% or more an average of 3.3 times per year.  They also found that a 10% or more decline occurred an average of 1.1 times per year.  And finally, they discovered that a decline of 20% or more occurred on an average of once every 3.4 years.

Yes, the markets can be volatile.  However, as the data from Ned Davis Research shows, volatility is normal, it’s expected, and as advisors, we try to plan accordingly.        

Source: Yahoo! Finance, Barron’s Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly. Three-, 5-, and 10-year returns are annualized.  Assumes dividends are not reinvested.

IT’S BEEN FIVE YEARS SINCE THE SARBANES-OXLEY ACT (SOX) WAS ENACTED in response to corporate scandals at firms such as Enron, Tyco, and WorldCom.  For directors, officers, auditors, securities analysts, and corporate lawyers that have securities, registered under the Securities Exchange Act of 1934, life is a lot more complicated.
However, SOX’s strict requirements on corporate governance, securities analysis, and audit work are paying off.  Today, according to a study by the Center for Audit Quality, an arm of the American Institute of Certified Public Accountants, 60% of investors report that SOX has increased their confidence in U.S. capital markets.

Corporate complaints about the high cost of complying with the law seem lost on individual investors.  Just 22% of those surveyed said the law should be eased to address concerns about its costs and any negative effect on U.S. competitiveness.  Only 5% of those surveyed said adopting the law was a bad idea.

Accountability and transparency are always a plus from an investor’s standpoint.

LAST WEEK, THE INVESTMENT COMPANY INSTITUTE issued its report titled, The U.S. Retirement Market 2006.  Among the key findings:

• Total U.S. retirement accumulations reached $16.4 trillion in 2006, an 11% increase over 2005.  Retirement assets now account for nearly 40% of all U.S. household financial assets, compared with 24% two decades ago.

• Employer-sponsored retirement plans play a key role in helping American workers accumulate retirement assets.  Nearly two-thirds of Americans’ retirement assets are held in employer-sponsored retirement plans.

• About half of Americans’ retirement savings are held in defined contribution plans and IRAs.  Assets in defined contribution (DC) plans and IRAs continued to grow more rapidly than assets in other types of retirement plans in 2006, increasing 15% compared with 8% asset growth for other retirement plans.  Together, assets in DC plans and IRAs represented 51% of retirement assets in 2006, up from 39% in 1990.

The good news is that, in a working world where the corporate pension has gone the way of the drive-in movie, Americans are accepting more responsibility for funding their own retirement.

Weekly Focus – Ah, the salad days of our youth…

Best regards,

Fredrick J. Livingston, CLU, CFP

Securities offered through LPL Financial, Member NASD/SIPC

* 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.

Brain Teaser Answer:  It contains the numbers one to nine, in alphabetical order.