Worse Quarter since the Fall 2008, What’s next?
The Market had it’s worse quarter since 2008. The leading averages have now been down five months in a row. The S&P 500 lost 14% for the 3rd quarter. European markets lost 23% for the same period. Here is a recap of the past 3 months:
July – After a volatile first half that eventually ended U.S. stocks in positive territory, the debt ceiling debate quickly took center stage. As policymaker’s debated ways to cut spending and raise the nation’s borrowing limit, stock markets faltered.
August – Following an eleventh hour debt ceiling compromise, Italy rose to the forefront of debt problems in Europe and anemic economic news pushed investor sentiment downward. As fear dominated the markets, major indexes erased their gains for the year during the first week of the month. Hitting especially close to home, S&P downgraded the nation’s bond rating from AAA to AA+ on August 5th.
September – After a brisk market rally early in the month, European debt woes dominated investor sentiment once again. By the middle of the month, tables turned dramatically as many asset classes experienced their worst weeks in years. Even gold faced its largest monthly fall since October 2008. In conjunction with persistent concerns about European debt and a weakening U.S. economy, the Fed's Open Market Committee (FOMC) launched “Operation Twist” on September 21st, leading to further selloffs.
In reading the quick summary above, it’s easy to see why investors could be forgiven for feeling somewhat dazed and confused. The last three months have been rough. The stream of bad news coupled with occasional flickers of optimism led to one of the most volatile periods ever for stocks. The Dow moved more than 200 points on 18 separate times during the quarter, swinging by more than 400 points on four consecutive days in August alone. When you couple the nauseating stock market performance with anxiety about the European sovereign-debt crisis and headlines forecasting a double-dip recession, it’s no wonder people are running scared.
Now What?
While past performance doesn’t guarantee future results, some investors are taking comfort in the fact that the third-quarter, historically, has been the worst of the year, and the fourth-quarter is typically the best. And while some are finding it difficult to be optimistic, others are turning their sights to corporate earnings for a barometer of where the economy is headed. Companies will start releasing their third-quarter reports in coming weeks.
Interestingly, the third-quarter edition of the Investment Manager Outlook (a survey of investment managers conducted by Russell Investment Group and released 9/29) found that 78% of managers do not expect the U.S. to slide into a double-dip recession. “Strong corporate balance sheets and high corporate profits should ensure that the United States avoids a new recession. However, Russell also believes, along with the majority of the managers surveyed, that we will see a slow-growth trend for the next several years, as well as ongoing market volatility,” the report stated. We agree with this assessment.
As long as confidence in the global economy and government policymakers remains shaky, markets are likely to be volatile. Even so, we still believe that fundamentals are strong in many areas, and we know that successful investing is a long-term project undertaken with risk and uncertainty. Equity markets do not move in a straight line, and neither do economic recoveries. Despite being painful, volatile periods like this historically run their course and then come to an end.
We understand that fear can be contagious, but we urge you not to let yourself be overtaken by it. While many types of investments are currently experiencing a difficult period, we believe that those who remain committed to their long-term investment plan will be rewarded over time.
If you have any questions or would like any guidance, please don’t hesitate to reach out to us. We consider it a great privilege to help you protect what you’ve worked hard to earn.
ECONOMIC CALENDAR: Monday – ISM Mfg Index, Construction Spending
Tuesday – Motor Vehicle Sales, Factory Orders
Wednesday –ADP Employment Report, ISM Non-Mfg Index, EIA Petroleum Status Report
Thursday – BOE Announcement, ECB Announcement, Jobless Claims
Friday – Employment Situation
Data as of 09/30/2011 1-Week 3Q YTD 1-Year 5-Year 10-Year
Standard & Poor's 500 2.11 -14.3 -7.73 1.68 -2.63 1.15
Dow 3.55 -12.1 -3.66 3.39 -0.90 2.61
NASDAQ -0.10 -12.9 -6.49 4.73 1.97 6.55
MSCI EAFE 4.81 -17.8 -13.4 -7.33 -3.26 2.64
10-year Treasury Note (Yield Only) 1.81 N/A N/A 2.52 4.63 4.57
Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized.
Sources: Yahoo! Finance, MSCI Barra. Past performance is no guarantee of future results.
Indices are unmanaged and cannot be invested into directly. N/A means not available.
HEADLINES:
According to a Bloomberg Gallup Poll, 63 % of global investors approve of President Barack Obama's plan to tax people with annual incomes of $1 million or more. The so-called Buffett rule is a nod to investor Warren Buffett and his New York Times op-ed piece calling on the wealthy to pay their fair share.
Consumers made less money and spent less money in August, according to a report released Friday. The Commerce Department said personal income declined by 0.1% in August. Consumer spending rose just 0.2%, and was flat when adjusted for inflation.
An examination of credit-rating agencies by the Securities and Exchange Commission staff found repeated instances of the companies failing to follow their own procedures or adequately manage conflicts of interest, according to an S.E.C. staff report issued Friday. The examinations were mandated in the Dodd-Frank regulatory law passed last year after numerous investigations into the causes of the financial crisis. Several of those inquiries found that the rating agencies issued inaccurate reports, failed to report or manage conflicts of interest, and put generating revenue ahead of rigorous financial analysis.
Eurozone inflation has surged unexpectedly to a three-year high of 3%, adding to the dilemma facing the European Central Bank as an escalating debt crisis pushes the region towards recession.
