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| Dog Days |
Tue. Aug 31, 2010 |
The celebration of better than expected earnings that made July the best month for the market in over a year, turned into a hangover in August as the dog days of summer brought a continuation of the slowing economic reports that hurt the market in May and June. During the first few days of the month the market continued the July rally on a solid manufacturing report and news that both China and the Eurozone continue to grow. However, another disappointing employment report on the 6th ended the celebration and the market, as measured by the S&P 500, responded by moving lower for most of the remainder of the month. At month end the index had lost 4.7% for the month and is down 5.9% for the year.
We had mentioned in our last update that for the past 30 years the average return for the month of August has been negative and, despite the strong move in July, we would remain cautious. During the month nearly every economic report showed an economy that was growing, but at a slowing pace. With our troops leaving Iraq and the oil spill in the Gulf winding down the news media was at a loss for things to talk about. As a result, the economy became the topic of discussion for most media outlets and since the economy itself is not that interesting to most people, talking heads decided to spice things up by spending their time not just talking about current economic conditions, but speculating on all of the "what ifs". Of course, their favorite "what if" is the economy weakening to the point where we would go back into recession, the much talked about double dip. Since there have only been 2 double dip recessions in history and both of them were the result of the Fed raising rates too soon during the recovery, baring some headline making international event, we don't see double dip as a likely scenario. However, by the end of the month the constant banter about "what if this" and "what if that" had made negative thinking common and had the average investor contemplating the seeming insanity of a 1% CD.
As we enter September we are reminded that over the past 30 years it has been the worst month of the year for stocks and we will continue to be cautious. However, during the economic recovery from the 2002 lows the market did move higher in September four consecutive years and the last September saw a 3.6% gain in the S&P 500. The missing element in the current recovery is confidence. Business lacks a clear picture of what is ahead and is reluctant to commit to new hires, more space and more inventories. Most other components necessary for growth are there; Declining loan losses have given the banks a lot of money to lend, big firms are sitting on some of the largest cash stock piles in history, individuals are getting their financial houses in order as evidence by the lowest credit card debt in 8 years and government policies remain supportive. We believe the current market weakness is simply a correction in the ongoing recovery and not the beginning of something more severe. Stocks, as measured by their forward price to earnings ratios, are at levels we have not seen since early 2003, right before the market began a move that saw it doubled in value in 4 1/2 years. While we will remain cautious we are looking forward to the mid term elections, as they have historically been followed by a strong market.
If you know someone who would be interested in learning more about Greenberg Financial Group, or who is retired or thinking about retiring, or would simply like us to review their current portfolio, we continue to offer our weekly retirement income workshops every Thursday @ 3 PM, now in two convenient locations. Natalie Fernandez is at Sam Hughes Place at 6th and Campbell and Dan Martin is at Sur-real at Campbell and Skyline. There is no need for a reservation.
As always, the key to successful investing is to have a portfolio that is consistent with your investment objectives and risk tolerance.
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