Market Update
September 30, 2011
3rd Quarter 2011 in Review
We just completed the most difficult quarter in years.
Large stocks such as those in the S&P 500 index lost
13.8% while smaller stocks in the Russell 2000 index
declined 21.8%. Previous favorites such as copper and
silver joined the decline, with copper losing 23% during
the quarter and silver falling back 13%. Bond prices
rose, as our research had suggested. The strong rise in
treasury bonds came in spite of the S & P downgrade of
their rating.
The stock declines were the most visible in August and
September. A number of economic reports tempered
growth expectations. For instance, consumer personal
income fell by $7.3 billion in August, as opposed to a
healthy $17.1 billion increase in July. We don’t look for
better news in October.
The economic downturn forecast in our mid-June study,
“Economic Slowdown?” appears to be upon us. When
consumers slow their buying, business firms suffer. And
recent data shows earnings for most sectors are
“heading south”. For example, materials earnings were
off 18% from the previous quarter, and industrials, telecommunications,
and financial stock earnings are also
edging lower. There were a few bright spots, namely
consumer discretionary and energy, where firms saw
rising earnings. Staples and utility earnings were steady.
Europe’s well known problems are of no help as Greece
continues to totter on the brink of default and several
other countries are little better.
Market Outlook
Our second quarter newsletter reported declining stock prices
and we adopted a cautious mode, especially with respect to financial
stocks and commodity issues. Our bond indicators had
strengthened leading us to extend maturities. These defensive
moves were helpful.
The stock market fell upon hard times during the third quarter,
with the median stock losing 18.92%. Big cap stock indexes
such as the Poor 500 lost 13.87% while smaller indexes such as
the Russell 2000 lost 21.87%.
What of the future? It seems that our domestic markets are increasingly
impacted by events abroad, with excessive debt being
the problem. Not only is this true in Europe, but parts of Latin
America as well. Political maneuvering in advance of the 2012
elections is also unsettling to some. Strong demand for safe US
securities, such as treasury bonds, has been generated.
Should security prices continue a bit lower for a time, the resulting
rebound could be sharp. Our stock indicators are improving,
and the bond indicators remain strong. During the fourth quarter
we could find a fine opportunity to select bargain stocks at bargain
prices.
Our research suggests that the US dollar will remain the “King
of Currencies.” In this environment, companies relying heavily
on exports will likely lag. This should be to the advantage of
smaller sized equities which typically have lower exporting exposure.
We find opportunities in many sectors, and the data looks favorably
upon utilities which typically have low exports. One area
of concern may be technology; our research suggests it is the
number one sector affected by the dollar’s movements. For this
reason, we expect to remain underweight in technology issues
at this time.
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