Don’s Outlook 10/31/08
The S&P 500 Index has recaptured all of its losses from the previous week, and the broad index is poised for additional gains today as buying has intensified across many industries and asset classes. Even emerging markets, which were devastated earlier in October, have experienced a significant rebound this week. Energy and gold prices stabilized, and materials stocks advanced after a week that saw them take big losses.
Investors appear ready to wade into some sectors that offer reduced risk, although fear remains an important obstacle for many. A rally in domestic shares is long overdue, and even bearish pundits are calling for the market to retrace its precipitous October decline. The timing and duration is difficult to forecast, but after a 25 percent decline over the course of a month—and when two-thirds of all trading days were negative—there is ample room for upside.
On Wednesday the Federal Reserve slashed interest rates back to 1 percent, one factor that supported this week’s S&P surge. At the same time, the Fed’s move to open its U.S. dollar swaps operation to emerging market central banks caused a widespread global rally again on Thursday.
The primary deterrent to more immediate market upside is the increasingly widespread call for a global recession to the magnitude not seen in the past 20 years. The current quarter could be the first of several negative growth rates. In fact, the Commerce Department’s advance GDP numbers from this week already show a 0.3 percent contraction in the third quarter—but the market expected a 0.5 percent decline and found the news heartening.
We are in the third week of corporate earnings announcements, and so far, the news has not been disastrous. With 74 percent of the firms having reported to date, there have been an equal number of positive and negative surprises; non-financial results have been strong, gaining approximately 13 percent from one year ago. However, fourth quarter estimates have declined due to the financial panic and expected global downturn. The key question, therefore, is whether the steep correction experienced to date is enough to account for continued economic weakness. Unlike other crises that have called for government intervention and financial market recapitalization, the market has already digested the most damaging losses incurred by the financial sector.
Although I expect more volatility ahead, I believe for long-term investors that quality stocks offer significant value at current prices and perhaps one of the best opportunities in a decade. For investors looking for attractive entry points, November and the next 12 months represent additional entry points for a strategy of dollar-cost averaging cash into stocks as the market strengthens. We will continue to work with each of you to ensure that your risk tolerance is in line with your objectives.
