Rebound Continues – Since the US stock market low on March 9, 2009, stocks have risen over 56% through the end of the third quarter. By some measures stocks have now returned to more reasonable levels. As quickly as the market freefall arrived, it has seemed to have abated. I think we have seen the bottom.
Continued Improvement - While the economy is not out of the woods yet, there are a number of encouraging signs for investors: consumer confidence has significantly improved; the housing market appears to have bottomed and may be turning a corner; the banking system has stabilized; some corporations have reported surprisingly good profits/earnings recently. Keep in mind that the unemployment rate is a lagging indicator which will likely remain bleak well into next year.
Sticking with a long term approach over the past 12 months has not been easy. And many have called asset allocation and modern portfolio theory into question. I have seen this talk many times before. It occurs in the thick fog of the moment when one is in the midst of a volatile and perhaps frightening period.
Don’t Just Stand There Do Something! - This has been a difficult period for investor and planner alike, but in the end, if you are a long term investor, you have to ignore the short term market “noise”. When I say noise, I am talking about many of the financial talk shows on TV, cable & radio. Many of these commentators have impressive experience and credentials. Sensationalism ‘sells’ really well in these mediums and we are only receiving the short sound bite that can fit into increasingly limited formats. Unfortunately, these incomplete messages often play right into what people want to hear. They want to know what to do and they want to DO something about it now, especially if they are scared as many people were in the fourth quarter of 2008.
We Say: Don’t Just Do Something, Stand There! - But successful investing does not work that way. Often investors should be selling when it seems that everything is great—and buying when a market apocalypse seems imminent. Seeing through the fog of the moment is the hardest part. It is not easy, even for experienced professionals to ignore the moment. In such an environment, the merits of sticking with a long term investment plan often are called into question. Our gut tells us to do something. When, in fact, changing our investment plan in the midst of a highly volatile stock market may be just the wrong thing to do at a very wrong time.
Continuing to Rebalance & Reallocate – Though it all I have seen the downfalls of both changing course midstream and also waiting to make an investment decision until the time is “right”. These decisions are driven by our “gut”, also known as fear and greed. Rarely, if ever, does this approach produce good results on a consistent basis.
Outlook
With the S&P 500 up another 15%+ again this quarter, the markets have had a great recovery in the second and third quarters. And even during early October, when many have grave concerns about the cost of proposed health care legislation and record budget deficits, the Dow Jones Industrial Average crossed back over the historically significant 10,000 mark. While I am expecting generally good quarterly earnings reports from corporations in the months ahead, I am not expecting stocks to rise any further by year end. As a forward-looking indicator, the stock market indices sometimes get ahead of themselves and, I think this may be one of those periods. We’ll have to see.
For now, we are continuing to emphasize the importance of rebalancing investment portfolios with an emphasis on investments that have the potential to weather higher inflation, benefit from a falling US dollar and be uncorrelated. These investments include certain types of bonds, alternative investments, and small company and international stocks.
Lyman H. Jackson, CFP®, MBA
Total Returns – September 30, 2009 (%)
Quarter 12 Months Trailing 5 Years Annualized
S&P 500 15.6 -6.9 1.9
Large company stocks 16.3 -6.4 1.6
Medium-sized stocks 20.6 -3.6 3.9
Small company stocks 19.3 -9.6 2.4
Foreign stocks 19.5 3.2 6.1
Taxable bonds 3.7 10.6 5.1
Past performance is not a guarantee of future results. Indices are unmanaged and investors are not able to invest directly in any index. Foreign investments involve special risks including greater economic, political and currency fluctuation risks, which may be even greater in emerging markets. Smaller-company stocks have experienced a greater degree of market volatility than large-cap stocks. Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation, market valuations, prepayments, corporate events, tax ramifications and other factors. Unlike stocks, bonds offer a fixed interest rate and return of principal if held until maturity. See index definitions below.
Investing involves risk including the potential loss of principal. No strategy can assure a profit nor protect against loss. There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio in any given market environment. The views expressed are not necessarily the opinion of Royal Alliance Associates, and should not be construed directly or indirectly, as an offer to buy or sell any securities mentioned herein.
Standard and Poor’s 500 Index (S&P 500®) is an unmanaged, capitalization-weighted index of 500 stocks. This index includes 500 blue chip, large cap stocks which together represent about 75% of the total US equities market. Companies eligible for addition to the S&P 500 have market capitalization of at least $4 billion.
Large companies are represented by the Russell 1000® Index. This index measures the performance of the 1,000 largest companies in the Russell 3000 Index, which represents approximately 92% of the total market capitalization of the Russell 3000 Index. As of the latest reconstitution, the average market capitalization was approximately $13.8 billion; the median market capitalization was approximately $4.9 billion. The smallest company in the index had an approximate market capitalization of $1.9 billion.
Medium-sized companies are represented by the Russell Midcap® Index. The Russell Midcap Index is a subset of the Russell 1000® Index. It includes approximately 800 of the smallest securities based on a combination of their market cap and current index membership. The Russell Midcap Index represents approximately 31% of the total market capitalization of the Russell 1000 companies.
Small companies are represented by the Russell 2000® Index. This index is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.
Foreign stocks are represented by the MSCI EAFE Index® denominated in US dollars, dividends reinvested net of taxes. The index is comprised of 21 MSCI country indices, representing the developed markets outside of North America: Europe, Australasia and the Far East. MSCI aims to include in its international indices 85% of the free float-adjusted market capitalization in each industry group, within each country.
Taxable bonds are represented by the Barclays Aggregate Bond Total Return Index, a market value-weighted index that tracks the daily price, coupon, pay-downs, and total return performance of fixed-rate, publicly placed, dollar-denominated, and non-convertible investment grade debt issues with at least $100 million par amount outstanding and with at least one year to final maturity. Total return includes dividends reinvested into the index.
Advisory services offered by Jackson Financial Advisors, Inc., a Registered Investment Advisor. Securities offered by Royal Alliance Associates, Inc., Member FINRA, SIPC. Jackson Financial Advisors is not affiliated with Royal Alliance.
Jackson Financial Advisors, Inc. is an independent firm specializing in financial planning and investment advice for individuals and families, as well as 401k and 403b retirement plan solutions for small businesses in the Greater Boston/MetroWest regions of Massachussetts.
