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Randall Financial Group News

16-Oct-09

2009 Q3 Market Summary

A recovery in financial assets appears to be in full swing as of the end of the third quarter. And the turnaround has been dramatic. Treasury bonds, the sole gainer in 2008, are the only major asset class posting a loss year to date. Equity markets continue to lead the charge in the third quarter. Domestically, the large cap S&P 500 is up 19.3% for the year while mid cap and small cap issues have also done well. The S&P Midcap 400 is up 28.38% for the year and the S&P600 Smallcap index is showing an 18.12% gain. Internationally, markets have faired even better. The MSCI EAFE Index of developed nations is up 29.6% and the emerging markets index is up an astounding 64.9% for the year. Both indexes were aided by the U.S. dollar, which has remained weak relative to other currencies. And positive returns have not just been confined to equities. Fixed income has showed a rebound as credit spreads have tightened and investors appetite for credit risk has returned. Investment grade corporate bonds are up 15% year to date and the Merrill Lynch High Yield Master II index is up an impressive 49% for the year.

From an industry standpoint, virtually all sectors are showing some strength. Financial stocks led the way as bank and brokerage balance sheets stabilized and many institutions posted impressive earnings for the second quarter. Industrial stocks have also shown significant strength, particularly companies positioned to benefit from increased economic stimulus spending. Third quarter earnings announcements are in full swing as this is being written but early signs suggest news will be positive. Analysts are predicting the third consecutive quarter of increasing S&P500 earnings per share. In Treasuries, the yield curve has continued to normalize as 10-year yields exceed 2-year yields by approximately 230 basis points. On the monetary front, the U.S. dollar has declined significantly while gold has touched record highs in excess of $1000 per ounce.

Most observers agree that the recession likely ended in the third quarter. We wont know for sure until third quarter GDP numbers are released. But the GDP decline in the second quarter was minimal and there have been several signs pointing to the end. The index of leading economic indicators is trending up for the year. And the critical housing and auto industries appear to have bottomed. The housing industry has received a boost form low interest rates and the $8000 new homebuyer credit set to expire in November. With these incentives, there has been an up tick in home prices this year coupled with a decrease in available inventory nationwide. Meanwhile the auto industry saw a significant jump in sales courtesy of the governments cash for clunkers program that ended in the third quarter. Manufacturing activity as a whole has rebounded (chart at left) with new orders up in the third quarter coupled with a draw down in inventories as sales have improved. Businesses are also benefiting from aggressive cost cutting that has resulted in increased manufacturing productivity year to date.

While all of these signs are positive, to say the economy is running on all cylinders would be very premature. As weve noted in previous commentary, consumer spending and employment, which go hand in hand, are critical. The employment picture is notorious for being the last thing to recover as we emerge from recession. Initial jobless claims have declined significantly, suggesting that corporations have mostly stopped with the mass layoffs. But the unemployment rate climbed to nearly 10% nationally in the third quarter, indicating that employers are still reluctant to add to payroll and are remaining lean in the face of continued economic uncertainty (chart at right). Consumer spending was boosted by the governments cash for clunkers program but will remain questionable as long as household net worth remains low and unemployment and personal savings rate are high.

Its also worth noting that, as the equity markets have jumped substantially year-to-date; price/earnings ratios are now above their historical averages. While rates remain substantially lower than recent market peaks, higher stock valuations will need to be accompanied by increased corporate earnings, lest the market become overly speculative. We think the chances of revisiting the lows of this March are minimal. But we can not rule out the possibility of a correction as our recovery continues to find its footing. We firmly believe that maintaining a cash cushion coupled with a fully diversified portfolio remains the best way to weather potential market storms, as proven by our recent performance. We will continue to keep you apprised of market events as they unfold.

Information presented here is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change.

© 2009, Randall Financial Group, LLC All rights reserved. Please Visit www.Rfinancialgroup.com

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