The Return of Volatility

A confluence of events in Europe last week sent the broad market stock indicies crashing 1000 points intra-day. The Dow Jones Industrial Average fell below the 11,000 mark, and the bears decided to make a little run into this 12-month bull market.

Setting aside any potential human error on the trading side, we know that the markers generally hate uncertainty; and things had been fairly uncertain with regard to how the European Central Bank would respond to the debt crisis in Greece. Things came to a head last week, during the same time the UK elections left a hung parliament (no political party with a clear majority) for the first time since the 1970’s. Uncertainty times two for a very important political and economic region.

As the European Central Bank’s rescue package became clear by Monday morning, markets began to recover. When a coalition UK government (the conservative Tories and Liberal Democrats formed a cooperative majority in parliament) was announced, UK markets reacted dramtically; and all of a sudden the Dow is flirting with the upper 10,000’s again.

With more European debt issues likely in the future and a mid-term election later in the year in the US, you can imagine more market volatility is in the offing. Right now the economic domestic data still looks good:
• April was the 4th month in a row of positive employment growth, adding 300,000 new jobs, which was well above estimates.1

• Strong factory orders for March announced this week affirm the strength in the manufacturing sector. Excluding the volatile transportation component, orders recorded the strongest month in 5 years.2

• Becoming the standard of recent quarters, companies are beating Wall Street earnings estimates. Earnings improvements are beyond the benefits of cost cutting as 75% of companies within the S&P 500 have reported higher top-line sales from a year ago.3

• In response to the good earning reports and economic indicators, future earning estimates continue to enjoy upward revisions for all of 2010 and 2011. 4

Last week’s events continue to remind us of the interdependencies of world economies.

1 Bloomberg, May 7, 2010

2 Bloomberg, May 4, 2010

3 Zacks Investment Research, May 4, 2010

4 Standard & Poors, operating earnings estimates, May 4, 2010

Diagnosing Fiscal Fitness

Trying to be your own financial advisor can sometimes feel like trying to perform surgery on yourself. But, you can certainly try to diagnose your own fiscal fitness. Here are a few items to keep in mind when looking at the health of your finances:

• Emergency Fund – Usually recommended to have 3 to 6 months of nondiscretionary expenses available in very liquid holdings.
• Debt Coverage – A good measure of mortgage debt is 28% of gross income
• Savings Rates – The largest part of retirement planning is the actual savings element. Typical healthy savings rates are in the neighborhood of 10-12%.
• Net-Worth Growth – Calculated by subtracting your liabilities from your overall assets, it also helps to look at how your net worth trends over a period of time. Is there growth in your net worth?
• Asset Location – While much is often spoken of asset allocation in controlling risk tolerance, asset location is more telling of controlling exposure to the opportunity of difference financial vehicles (e.g., cash-value life insurance vs. term, liquidity of one investment vs. another, or tax-efficiency of one investment vs. another, etc.)
While these are some great elements to examine with regard to your current financial condition, making the right adjustments is key. Because of the plethora of decisions to be made in your financial life, self-diagnosis will probably only take you so far.