Don’s Outlook 10/17/08
A global coordinated bailout package negotiated last weekend by G7 members in Washington, followed by an agreement in Paris among EU member nations, triggered a global rally in equities earlier this week to reverse the panicked selling that plagued the markets for most of last week. In fact, between the violent swings, the S&P 500 climbed 24 percent higher from the low on Friday to the high on Tuesday.
The past several weeks have undoubtedly tested the steeliest of investors. Those of us that remained invested through the most volatile periods of the past several decades are less accustomed to experiencing a decline in all asset classes, including bonds and even our homes. The trauma inflicted by the global financial crisis will produce an economic slowdown, and this, in turn, will impact corporate earnings and profitability.
This week the Empire State manufacturing index signaled a slowdown in production as manufacturers anticipate a reduction in consumer spending. Industrial production declined 2.8 percent, although the number was affected adversely by irregular activity, such as the strike at Boeing and recent hurricanes. Retail sales fell by 1.2 percent, but only 0.6 percent when car sales are removed from the measurement.
Nevertheless, we are approaching the point where we need to guard against a harmful myopia. The economic headlines will most likely deteriorate over the next several months, and into the next quarter, but the stock markets have factored much of this short-term economic decline into current prices. Many stocks are trading at bargain levels not seen in decades and yielding far more than their historical averages. Moreover, many companies have large amounts of cash on their balance sheets, reflecting the fiscal strength they’ve created during the last bull market.
As an op-ed contributor to The New York Times, Warren Buffett reminds us that we need to be greedy when others are fearful because fears over the long-term prosperity of the nation’s best companies do not make sense. He admits that he cannot predict where the U.S. stock market will be one month or one year from now, but he believes equities will outperform cash over the next decade, and he expects to participate with 100 percent of his personal wealth. The market always moves higher before investor sentiment or the economy turns around, so he is buying stocks now.
In regard to current client holdings, I have spent this week talking with the fund managers that direct the largest client positions. Both stock and bond managers alike are focusing on defensive positions in the short term and are looking for opportunities that will arise with each step toward economic recovery.
If you have any questions or concerns please respond to this email or call your Dion account representative at 877-850-7942.
