Macro Factors and Their Impact on Monetary Policy, The Economy and Financial Markets
by Jim Welsh, Forward Markets
Co-authored with David Martin and Jim O’Donnell
U.S. Economy
Going into 2013, most economists were not expecting much growth in the first quarter, especially with the increase in the Social Security tax lowering workers take-home pay. In a February survey by the National Association of Business Economists, more than 95% of economists surveyed forecast gross domestic product (GDP) growth to average just 1.5% in the first half of 2013. They anticipated that growth would be held back by higher taxes, federal budget tightening and fiscal uncertainty. This forecast was also likely influenced by the Commerce Department’s initial report on fourth quarter GDP, which was originally reported as a decline of 0.1%. With the expectation bar set low, it has been relatively easy for economic reports to come in better than expected, which has given the stock market a boost.
The Commerce Department has revised GDP growth for the fourth quarter of 2012 from a minus 0.1% to plus 0.4%, as we expected last month. Our main point last month was that the economy was in better shape in the fourth quarter than the GDP estimates suggested. We noted that final demand grew 2.3% in the fourth quarter as consumer and business spending remained steady. The drawdown of inventories, which lowered fourth quarter GDP by -1.27%, was expected to add to growth in the first half of 2013 as inventories were rebuilt. Defense spending experienced its steepest decline in 40 years and cut GDP by 1.33% in the fourth quarter. Even if the sequester, or automatic budget cuts taking place March 1, are not modified, it’s unlikely the decline in defense spending will have as much impact in any single quarter in coming years. Once these special factors were acknowledged, it was clear the economy entered 2013 on a stronger footing than it initially appeared based on the GDP estimates.
Most economists expected the Social Security tax increase in the beginning of the year to cause consumers to curb their spending, which would be a drag on first quarter growth. That reasoning may be logical, but, in our opinion, does not reflect how most American consumers behave. The 2% increase in the Social Security tax will lower median family income of $50,000 by $1,000 in 2013, or about $20 per week. Most economists expected consumers to adjust their spending habits accordingly, causing an immediate negative impact on the economy as millions of Americans cut back. However, we doubted that after receiving their first paycheck in January, workers would race home and proclaim, “Honey, the government just shrunk my paycheck! We can’t go out to dinner this week.” That’s just not how the American consumer has typically behaved. Historically, when confronted with a little less net pay, most consumers will charge a bit more or dip into savings to maintain their lifestyle. After all, that’s what savings are for! However, over time, as the credit card balance creeps higher and the savings balance dips below a round number, the average American consumer will grudgingly and reluctantly curtail spending. This is why we expect consumer spending to gradually weaken in coming months, as an increasing number of consumers make the decision to pare spending. However, the National Association of Business Economists survey also found that the surveyed economists forecast growth to accelerate to 2.4% by the fourth quarter of 2013. As we wrote last month, most economists are expecting growth to pick up in the second half of 2013 and that’s when things are likely to get interesting.
The Commerce Department reported that retail sales jumped 1.1% in February, but more than half of the increase was due to higher gasoline sales as a result of higher pump prices. Core retail sales, which exclude gasoline, autos and building materials, were up 0.4%, which is a reflection that final demand is holding up. According to the report, however, the personal savings rate fell to its lowest level since before the 2008 recession and credit card balances increased as well. This confirms our view that consumers were likely to maintain their spending habits in the short run by dipping into savings and increasing their credit card usage. The retail sales report also contained hints that lower income consumers may already be too strapped or unwilling to tap savings or increase credit card debt. Furthermore, the report indicated that February’s electronic sales were off -0.2%, restaurant sales were down by -0.7% as people chose to not eat out as much, department store sales fell -1.0% and furniture sales dropped by -1.6%. Absent a surge in income, many consumers are likely to exercise more spending restraint in coming months, which is one reason why we are skeptical of a pickup in the economy in the second half of the year.
According to the Labor Department, the top 20% of wage earners account for 38% of all spending, which almost equals the spending of the bottom 60% of wage earners combined. The top wage earners are more likely to have significant investment portfolios and more expensive homes. As a result, they have benefited from the run to new highs in the stock market, continued strength in the bond market and a rebound in home values. Federal Reserve Chairman Ben Bernanke has articulated that the “wealth effect“- the premise that higher asset values make investors more secure in their wealth and spending-is one of the goals of current monetary policy since it will help sustain consumer spending and GDP growth. One of the reasons many economists are expecting growth to accelerate in the second half of the year is based on the improvement in housing and gains in the stock market, with the expectation that consumer spending will increase. However, a recent analysis of the wealth effect by Credit Suisse, an international financial services company, suggests consumer spending may not be as responsive to increases in the wealth effect as it was before the financial crisis.
Consumers were profoundly affected by the 30% decline in home values and more than 50% plunge in the stock market in 2008. As a result, consumer spending has not been as positively correlated to increases in home values and stock prices since 2008 as they were between 1993 and 2007. For instance, between 1993 and 2007, each $1 gain in home values boosted household consumption by $.05, or 5.0%. If a homeowner saw their home appreciate by $50,000 over a few years, the homeowner would spend 5% of that gain, or an extra $2,500 over time. Multiply that by 20 or 30 million homeowners during the housing boom years between 2002 and 2006 and one can appreciate the boost GDP received. Over the last five years the housing wealth effect has slipped to $.033 or 3.3%. This 34% decline in the housing wealth effect understates the overall reduction, since home values are still down by 25% in many parts of the country. The recent rebound in home prices has merely narrowed the number of homeowners with a mortgage who are underwater from more than 25% to 21.5%. For those homeowners the wealth effect in coming months will likely be nil. Even though they may feel a little better, they are not likely to go on a spending binge anytime soon. The stock market wealth effect has also lessened. Over the last five years, the correlation for a $1 gain in the stock market to household consumption has fallen from $.015, or 1.5% during the period of 1993-2007, to $.011 or 1.1%. This suggests that a consumer with a gain of $50,000 from stocks or mutual funds would likely spend $550, rather than the $750 they would before 2007. The 26% decline in the stock market wealth effect likely understates the experience of most investors. Since the low in March 2009, investors have pulled money out of large cap mutual funds in each of the last four years, according to Morningstar. This suggests that a good number of investors have not fully benefited from the increase in the stock market, so the potential spending from recent gains in coming months is likely to be less than expected.
Until 2008, most Americans had never experienced a significant decline in their home’s value and believed home prices could only go up or would at worst hold their value. Many homeowners in their 50s were counting on the equity in their home to fund a sizable portion of their retirement. The results of a recent report by the Employee Benefit Research Institute are alarming. The survey of 1,003 workers and 251 retirees found that 57% of the workers had less than $25,000 in total household savings, excluding their homes. In 2012, just 66% of workers put aside money for their retirement, down from 75% in 2009. The odds are they didn’t save more money because their income hasn’t kept up with the cost of living during the recovery, and they simply don’t have the extra money to set aside. Only half of those surveyed said they were sure they could come up with $2,000 if an unexpected need arose in the next month. The survey also found that 28% said they have no confidence they will have enough money to retire comfortably, the highest level in the study’s 23-year history.
Those who retired before 2007, after working hard for decades, saving their money and possessing a nest egg that would allow them to retire comfortably, have been crucified by the Federal Reserve’s low interest rate policy. In 2007, they could safely invest in a 5-year Certificate of Deposit (CD) and earn at least 4.5% on their savings. When that CD matured last year, investors were confronted with a frightening new reality. Rather than receiving $4,500 each year for every $100,000 invested, they would be lucky to earn $1,000, a decline of almost 80%.
According to CoreLogic, a real estate research firm, 21.5% of homeowners with a mortgage are still underwater, and that figure does not include the costs of selling a home. We suspect many of these homeowners are still in shock that their mortgage exceeds their home’s value and that all of their equity has been wiped out. Little wonder then that despite the rebound in home values most homeowners are not psychologically ready to view their home as an ATM as many once did.
The Credit Suisse analysis mentioned earlier also found that increases in disposable income dwarfed increases in home or stock values in lifting consumer spending. Every $1 increase in disposable income led to a $.99 increase in spending. Given how unprepared many workers are for retirement, a greater portion of future increases in disposable income is likely to be saved in coming years. Instead of spending $.99 of each $1 increase, an increasing number of workers will chose to spend less than $.99 and save more than $.01. The trend in disposable income since 2000 is not good. Over the last two years, average weekly earnings have risen by less than 2%, which is less than the cost of living. Adjusted for inflation, wages have fallen for 22 of the last 24 months. Median income has been trending lower since 2000, and at the end of 2012 was back to 1995 levels. Despite the economic recovery since June 2009, median income is still $2,400 less, or more than 4% below where it was in June 2009, according to Sentier Research, which analyzes data on American households.
Considering the decline in the wealth effect for housing and stocks, the need for many workers to increase their retirement savings and the discouraging trend in disposable income, the expectation of an increase in consumer spending that would help lift GDP growth to 2.4% in the second half of this year seems optimistic.
In January new home sales were up 28.9% from a year ago, while existing home sales increased 9.1%. The discrepancy between new and existing home sales is largely a function of the low inventory of existing homes for sale. According to the National Association of Realtors, the number of existing homes listed for sale in January totaled 1.74 million, which was down 4.9% from December and the lowest number since December 1999. The low inventory has helped lift home prices. According to the S&P/Case-Shiller U.S. National Home Price Index, home prices increased 8.1% from January 2012. Two factors have contributed to the small level of inventory. Despite recent price gains, 21.5% of existing homeowners are still underwater and simply can’t afford to sell. During the last two years, investment pools have also removed most of the inventory of homes selling for less than $125,000 in markets that were hit the hardest by foreclosures. Investors accounted for 21% of all purchases, unchanged from last year. Although lending standards are still fairly tight, the affordability of housing in many markets is near all-time highs since mortgage rates are hovering just above all-time lows. Many economists point to the improvement in housing as the main reason why consumers may feel wealthier and why they expect the economy to improve in the second half of the year. If that’s true, why is consumer confidence still stuck at levels (below 80) only associated with past recessions?
In February, 236,000 new jobs were created, which lowered the unemployment rate to 7.7% from 7.9% in January and 8.3% a year ago. Despite this apparent good news, another 130,000 workers left the labor force, which caused the labor participation rate to fall to 63.5%, the lowest since 1981. The share of unemployed workers who have been out of work for more than six months increased to 40.2% in February, up from 38.1% in January. Clearly, discouraged workers are simply giving up looking for a job, which is why they are dropping out of the labor market and why the participation rate continues to decline. We have no doubt that some of these discouraged dropouts are older workers who have either officially or unofficially retired, or chosen to apply for disability benefits under Social Security. Since June 2009, when the recovery officially began, 3.7 million workers have gone on Social Security Disability Insurance (SSDI). In 1992, there were 35 workers for each person on SSDI. Now there are only 16 workers for each of the 11 million people in the Social Security disability program.
Job growth in the current recovery is about half the average pace recorded in the 10 prior recoveries since World War II. But the problem with the quantity of jobs created also extends to the quality of the jobs in this recovery. In a study published last August, the National Employment Law Project, a low-wage advocacy group, found that mid-wage occupations made up 60% of the jobs lost during the 2007-2009 recession, but just 22% of the new jobs in the recovery. The study also determined that lower wage occupations represented 58% of the jobs recovered, but only were 21% of the jobs lost during the recession. The New York Times found that through February, the unemployment rate for those with a college degree and over age 25 was 3.8%, versus 2.0% before the recession. For recent college graduates under age 25, the unemployment rate has averaged 8.1% over the past year compared to 5.4% in 2007. These statistics suggest that unemployment remains elevated because aggregate demand is too weak, even for those who have an education.
Last month we discussed the details of the Affordable Care Act and the potential labor market distortions that are likely to prove a net negative for income and job growth even before its implementation in 2014. In the Federal Reserve’s March 6 Beige Book (a report on current economic conditions published eight times per year), the Atlanta, Chicago, Dallas and Kansas City districts cited reports of employers who were curbing hiring or reducing worker’s hours to less than 30 hours per week so they can avoid the increased costs of the Affordable Care Act. We’re going to go out on a limb and venture we’ll be hearing from more districts in coming months about the impact of the Affordable Care Act.
This seems like déjà vu all over again. In the fourth quarter, 50% of new homes were sold to borrowers with some type of government guaranteed loan, with the Federal Housing Administration (FHA) backing 31% of the sales, compared with just 10% five years ago, according to research provider Zelman & Associates. The FHA was created in 1934 to provide “homeownership opportunities for first time home buyers and other borrowers who would not otherwise qualify for conventional mortgages on affordable terms.” In 1934, the FHA’s minimum down payment was a prudent 20%, which was lowered to 10% in the 1960s. Since 2007 the FHA has significantly increased its mortgage lending and lowered its lending standards. Being familiar with the subprime mortgage lending fiasco, we can guess where this is heading. Borrowers only need a down payment of 3.5%, and a credit score of 580 out of a possible 850, to get a loan, as long as the borrower’s monthly housing mortgage payment is less than of 30% of income. However, the FHA’s auditor has found that these already low lending standards have often been ignored. In 2010, 40% of the loans the FHA made were to borrowers whose total monthly mortgage payment was greater than 50% of their monthly income, or who had a credit score below 660. In plain English, 40% of the 2010 loans were subprime and guaranteed by U.S. taxpayers. Furthermore, the premium charged by the FHA was the same whether the borrower had made a down payment of 3.5% or 20%, had a credit score of 580 or 720, or whose monthly mortgage payment was 50% of income or 25% of income. If a large investment bank was using this level of risk management, it would have drawn intense scrutiny.
Since 2009, the amount of mortgages guaranteed by the FHA has grown from $685 billion to $1.1 trillion, an increase of 60%. Given the FHA’s lax lending standards, it may not come as a surprise to learn that a high percentage of its loans are seriously delinquent. The following delinquent loan figures are as of June 30, 2012: 2007-25.82%; 2008-24.88%; 2009-12.18%. As of September 30, 2012, 17.3% of all FHA loans were delinquent. By law, the FHA must maintain a capital ratio of 2.0% of the amount of mortgages it has insured. In 2009, the FHA’s capital ratio was 0.53%, far below the 2.0% mandated by law, and it hasn’t improved. In a report released on November 16, 2012, the government reported that the FHA’s liabilities exceeded its assets by at least $16.3 billion. This means the FHA’s capital ratio is a negative -1.44%. It is of concern that Congress and the administration continue to allow the FHA to make loans when it is operating with a capital ratio below the level mandated by law. If the FHA was a public company, it would have been declared bankrupt, just like Fannie Mae and Freddie Mac.
It appears unlikely that Congress, regulators or the administration will address the FHA’s capital deficiency anytime soon. Our point is that the recovery in housing is being financed with similar lax lending standards that created the housing bubble in the first place and contributed to the financial crisis. Despite the support of this imprudent lending, the recovery in housing needs to be put into perspective. In 2005, new home sales reached 1.4 million. Although sales were up at an eye-catching annual rate of 28.9% in January 2013, they are still down 68% from the peak in 2005. Even if we use the 1999-2002 average of 900,000, January sales are still 50% lower than before the bubble years.
As we mentioned in our December commentary, the average age of all vehicles in operation is at a record high of 11.2 years, according to research firm R.L. Polk. Manufacturers have improved the overall quality of cars and financial conditions have forced many consumers to simply keep the old jalopy running. The improvement in the economy, lower auto loan rates and aggressive leasing programs spurred a nice recovery in sales in 2012. In February, automakers sold 1.19 million vehicles, a gain of 3.7% from February 2011. According to research provider Autodata Solutions, the seasonally adjusted annual sales were 15.4 million vehicles in February. From 2001, when automakers first introduced 0% financing in the wake of 9/11, through 2007, auto sales averaged roughly 16.6 million vehicles annually. The housing bubble assisted sales since homeowners were able to purchase a new car by using a home equity loan backed by their inflated home value. With that option no longer available, automakers are relying on other methods to lift sales. In the fourth quarter, the average repayment term on new car loans rose to a record 65 months from 63 months in 2011. Credit-tracking firm Experian reported that subprime borrowers represented 24.77% of new car buyers, up from 22.59% a year ago. Subprime loans for used car purchases comprised 55.4% versus 53.58% in the fourth quarter of 2011. If job and income growth were stronger, fewer buyers of new and used cars would need record repayment terms or subprime loans.
In 2004, student loan debt was less than $350 billion. Since 2008, student loans are the only category of consumer debt that has risen and it has exploded 51% from $640 billion to $966 billion in 2012. Student debt now exceeds auto loans ($768 billion), credit cards ($624 billion) and home equity lines ($573 billion) as of September 30, 2012, based on data from the Federal Reserve Bank of New York. On March 7, 2013, the New York Fed reported that 35% of student loan borrowers under age 30 were at least 90 days late on their payments at the end of 2012, up from 21% in 2004. Surprisingly, the Education Department became the originator of 90% of U.S. student loans thanks to a provision passed along with the Affordable Care Act in 2010. Few members of Congress bothered to read the Affordable Care Act before it was passed, so it’s astonishing to learn that one provision of the act could put taxpayers on the hook for several hundred billions of student loan debt. In addition, the federal government does not check credit records for most student loans. With the increase in government rules and regulations since the financial crisis, one wonders what politics are involved for such a blatant omission over such a substantial sum of potential taxpayer liability.
Eurozone
The decision by the International Monetary Fund, European Union and European Central Bank (ECB) to not insure Cyprus depositors with balances over 100,000 euros ($130,000) is a dangerous precedent that could have negative ramifications for the weaker banks in Spain and Italy, and U.S multinational firms. During the financial crisis in the U.S., the deposit insurance was increased from $100,000 to $250,000 to prevent deposit runs from weak banks that would have only weakened them further. The Spanish and Italian economies are not likely to emerge from recession during 2013, which will increase pressure on the banks in both countries. Wealthy Europeans with deposits exceeding $130,000 are more likely to move money out of weak banks in both countries in the wake of the Cyprus decision. There is also a greater likelihood that money will flow out of the euro and into the dollar, as international money seeks the safety of the U.S banking system. The exodus of money can make weak Spanish and Italian banks weaker, cause the euro to decline and boost the value of the dollar. Negative capital flows might make the recession in the eurozone deeper and more prolonged. A stronger dollar is not a positive for multinational U.S. companies that derive a large share of their revenue and profits overseas. This may have negative ramifications for the U.S. stock market, which has had an uninterrupted advance and arguably is due for a correction.
Last July, after European Central Bank President Mario Draghi said the ECB stood ready to do whatever it takes to address Europe’s sovereign debt crisis, bond yields in Spain, Italy and the rest of Europe began a multimonth descent. Many global investors have concluded that the decline in bond yields signifies that the worst of the economic crisis in Europe is passed. We’re not so sure. Without question the reduction in bond yields lowered the temperature of the crisis from the boiling point, since lower refinancing costs have made it possible for Spain and Italy to readily rollover debt at a far more manageable cost. However, the economic crisis is still simmering. GDP in the eurozone has not grown since the third quarter of 2011, contracted by -0.5% in 2012 and is expected to shrink by -0.1% to -0.9% in 2013, according to the most recent estimate by the ECB. In January, production in the eurozone declined -0.4%, as capital goods output dropped -1.2%, durable consumer goods slid -1.4% and energy production fell -1.0%. Industrial output also declined in Germany and France, the eurozone’s two largest economies. If France’s economy weakens further, the eurozone’s economic crisis could escalate quickly.
Italy, the third largest eurozone economy, shrank by -2.4% in 2012. With Italian banks curtailing lending, more than 360,000 Italian businesses went out of business last year. The failure of the February election to elect a functioning government has left Italy floundering, which only increases the risk that its recession will become deeper and more prolonged. This prospect is why Fitch Ratings lowered Italy’s issuer default ratings to BBB+, three steps above junk. Italy is carrying $2.6 trillion of public debt, which may reach 130% of GDP by the end of 2013. Without economic growth, Italy will find it increasingly difficult to service such a mountain of debt no matter how low its interest rates.
According to research from the Bank of Italy and the University of Verona, Italians born in 1970 will pay 50% more in taxes as a percentage of their lifetime income than those born in 1952. The marginal income tax for a worker earning $40,000 is 38%, up from 25% in 1992. The disillusionment of this generation with their standard of living was seen in last month’s election when 26% of those in their 40s voted for comedian Beppe Grillo. The Italian government has become a joke, literally and figuratively. The only problem is no one is laughing.
With youth unemployment rates over 55% in Spain and Greece, those under 25 are the generation most affected by Spain’s recession and the depression in Greece. However, with an overall unemployment of more than 25% in both countries, every generation is suffering. As the recession lingers in the weakest economies, the risk of social unrest and even revolution cannot be dismissed. Those most affected are not comforted by policies that simply lower interest rates when the future looks so bleak.
Stock Market
Our approach combines both fundamental analysis and technical analysis, which is unusual. Most economists and financial advisors rely almost exclusively on fundamental analysis, which focuses on the economy and estimates for corporate earnings. Technical analysis utilizes measures of price momentum, moving averages and charts of the major market indices like the Dow Jones industrial average and S&P 500 Index. We believe the combination of both disciplines is better, since each provides a different perspective. The probability is higher that our analysis is on target, when the fundamentals and technical indicators are aligned, especially at turning points in the economy and stock market. Fundamental analysis may indicate that the economy is likely to improve or fade, but technical analysis can help pinpoint when the shift is about to take place.
Our fundamental analysis suggests that expectations for acceleration in the economy in the second half of 2013 could prove too optimistic. If improvement fails to materialize, we would expect to see deterioration in the technical health of the market before the fundamental news turns less favorable, since that is what has often happened prior to significant corrections. The Major Trend Indicator (MTI) is a proprietary indicator we use to measure the strength or weakness of market rallies and declines. Whenever a rally carries the MTI above 3 (shaded area in graph at right), it is because investors have a number of fundamental reasons to be buyers and is a sign of market strength. It is rare that all the positive factors disappear overnight, so dips after a strong rally are usually used by investors to buy, which normally limits any correction to -4 to -7%. The current rally has been strong and has carried the MTI above 3. Last month the odds favored the S&P 500 rallying above 1,531 after a correction to 1,465-1,485 due to the strength in the MTI. The S&P 500 dipped to 1,485 and has rallied above 1,531. A review of the daily chart of the S&P 500 shows that a five-step rally from the November low is nearing an end, which suggests that the market is within 1-2% of an intermediate high. This raises the odds that the upcoming correction could be deeper and more prolonged than any of the corrections since last November. That said any correction is likely to be within -4 to -7%, since investors have few reasons to sell and are looking to buy the dips.
Frequently, fundamental deterioration is preceded by a failed rally in the MTI. Therefore, we will remain vigilant for signs of a rally that does not lift the MTI above 3. The depth of a correction after a failed rally is determined by the negativity of the subsequent news.
Gold and Gold Stocks
In our January commentary, we discussed the potential that gold had been consolidating its significant rally from $700 in 2008 to its peak at $1,920 in September 2011. Technically, we thought gold had been tracing out a triangle, and might dip one more time to $1,525-$1,550 to complete the triangle. On February 21, 2013, the April contract in gold dropped to $1,554.30. Last month our guess was that gold was likely to drop below this level, after an oversold bounce and do more “work” before an important low was completed. Since then gold has being doing more work, and we still think the odds favor one more drop below the February low, which was $1,560 on the August contract. However, if August gold trades above $1,659, the odds would increase that the low was in place. Gold must hold above $1,480-$1,500 on a closing basis to keep the triangle pattern intact, and the subsequent potential for a rally to $2,200-$2,300 over the next 18 months. A decline below this support area would be a long-term negative.
Gold stocks are historically cheap relative to the price of gold. If gold follows the script, not only will gold enjoy a very good rally, but the gold stocks may even outperform. The ratio of the Philadelphia Stock Exchange Gold and Silver Index (XAU) to gold is simply the price of gold divided by the XAU. Gold stocks become more expensive relative to gold when the ratio declines, and cheaper as it rises. From 1998 until the financial crisis in 2008, the ratio fluctuated in a range of 3.6 to 5.3. Whenever the ratio was above 5.0 it was usually a good time to buy gold stocks. Since 2008, the ratio has continued to rise as the gold stocks lagged behind the huge rally in gold. Part of this is due to the popularity of the exchange-traded fund SPDR Gold Shares (GLD), which has made buying gold easier for the average investor. But gold mining companies increased their cost of production with excessive exploration of new mines that didn’t pan out, even as gold rallied from $700 to $1,920. Chastised, companies have been shutting unprofitable mines and cutting costs over the last year. In early March, the Gold/XAU ratio reached 12.2, so gold stocks are the cheapest they have been relative to gold in the last 25 years. Gold stocks are inherently volatile, so they are not appropriate for many investors, no matter how cheap they appear. And if gold drops below $1,480-$1,500, the gold stocks could decline materially, so risk management is essential.
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Investing involves risk, including possible loss of principal. The value of any financial instruments or markets mentioned herein can fall as well as rise. Past performance does not guarantee future results. This material is distributed for informational purposes only and should not be considered as investment advice, a recommendation of any particular security, strategy or investment product, or as an offer or solicitation with respect to the purchase or sale of any investment. Statistics, prices, estimates, forward-looking statements, and other information contained herein have been obtained from sources believed to be reliable, but no guarantee is given as to their accuracy or completeness. All expressions of opinion are subject to change without notice.
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Definition of Terms
BBB+ is a Fitch Rating that indicates that expectations of default risk are currently low. The capacity for payment of financial commitments is considered adequate but adverse business or economic conditions are more likely to impair this capacity.
Dow Jones industrial average (DIJA) is a price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry and are listed on the New York Stock Exchange. It has been a widely followed indicator of the U.S. stock market since October 1, 1928.
Drawdown is the gradual decline in the price of a security or other investment between its high and low over a given time period.
Fannie Mae (Federal National Mortgage Association) is a government-sponsored enterprise that was created in 1938 to expand the flow of mortgage money by creating a secondary mortgage market. Its purpose is to increase the availability and affordability of homeownership for low-, moderate- and middle-income Americans.
Freddie Mac (Federal Home Loan Mortgage Corporation) is a stockholder-owned, government-sponsored enterprise chartered by Congress in 1970 to keep money flowing to mortgage lenders in support of homeownership and rental housing for middle income Americans.
Gold/XAU ratio is a ratio that compares the price of gold to the precious metal stocks that comprise the Philadelphia Gold and Silver Index (XAU).
Junk bonds are bonds that are rated below investment grade at the time of purchase. They have a higher risk of default or other adverse credit events, but typically pay higher yields than better-quality bonds in order to make them attractive to investors.
Philadelphia Stock Exchange Gold and Silver Index is an index of 16 precious metal mining companies that is traded on the Philadelphia Stock Exchange. It is one of the most closely followed gold indices on the market.
S&P 500 Index is an unmanaged index of 500 common stocks chosen to reflect the industries in the U.S. economy.
S&P/Case-Shiller U.S. National Home Price Index is a quarterly composite of single-family home price indexes for the nine U.S. Census divisions.
SPDR Gold Shares is part of the SPDR family of exchange-traded funds managed and marketed by State Street Global Advisors. It is designed to track the price of a tenth of an ounce of gold.
One cannot invest directly in an index.
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The new direction of investing
The world has changed, leading investors to seek new strategies that better fit an evolving global climate. Forward’s investment solutions are built around the outcomes we believe investors need to be pursuing-non-correlated return, investment income, global exposure and diversification. With a propensity for unbounded thinking, we focus especially on developing innovative alternative strategies that may help investors build all-weather portfolios. An independent, privately held firm founded in 1998, Forward (Forward Management, LLC) is the advisor to the Forward Funds. As of December 31, 2012, we manage $5.7 billion in a diverse product set offered to individual investors, financial advisors and institutions.
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