Great Week, But One of the Worst Months Ever!

A turnaround last week as the market reversed trend with the S&P rising 10.5% in one of the best weeks ever! The NASDAQ followed suit increasing 10.9%. Fear, as measured by the volatility index, subsided despite poor economic reports. While the week ended well, the end of the October marked one of the worst months on record after losing 16.9% even after accounting for the strong abnormal gains last week. In fact, October 2008 was the worst monthly performance in 21 years, since October 1987. Volatility decreased by the end of last week, and that will bring investors back to the markets. However, lower volatility levels over a longer sustained time period will be needed in order to get the strong buying interest that is needed to push the market significantly higher.

Hope, Resilience in the Face of Tough Economic Conditions

Last week brought hope with strong market performance and lower volatility. The relentless selling we have seen over the past few weeks finally subsided. Are we at the end of the selling frenzy from institutional investors and hedge funds? Now that we are in November, the tax selling and portfolio rebalancing we have been seeing should decrease, along with the selling frenzy. Volatility, which has been at extreme levels, will likely remain high, but should decrease as the selling pressure subsides. Another good sign was that the market was able to hold the whopping gains made on Tuesday that moved the index up more than 10% in a single day. In addition, the market ended the week strong despite economic reports that were very poor. GDP declined in the 3rd quarter, consumer spending was down 3.1%, consumer confidence hit record lows, and jobless claims rose to recession levels. Despite the bad news, the market was able to shrug off the economic data, and maintain the gains made on Tuesday. However, there were also positive developments in the economy, such as interest rates that continue to fall including the Libor, commercial paper, and federal funds rate, all of which have fallen to very low levels. The Fed recently cut the fed funds rate to 1% and even hinted there may be more room for rates to fall further since inflations concerns have been neutralized with slowing global growth. Lower rates are indeed positive for the stock market, although expectations on future decreases should be tempered as rates are already very low. For example, the fed funds rate has not been below 1% since 1958, and rates cannot go below zero! Oil prices have also been a plus as October marked the biggest drop in 25 years with prices falling 36% for the month, and 56% from highs in July. Lower oil prices offer very real and tangible benefits to main-street. Consumers will feel the savings at the pumps which will hopefully generate more optimism. New home sales rose, a trend change that the housing market desperately needs. These positives are encouraging and will help balance the negative, but all in all, the economy will need to time to recover and work through the excesses of past years.

Big Events Next Week: Elections and More Economic Data

In corporate news, third quarter earnings reports remain in full swing with over half already having reported. To date, earnings reports have been mixed, although the most future outlooks have been cautious given the economic turmoil. More and more companies are announcing job cuts as future outlooks continue to deteriorate. The economy is clearly struggling and our view is that those challenges will likely continue well into 2009. Next week will bring more big news as the Presidential election closes, and the market evaluates the winner. Reports on manufacturing, as well as service level activity will also be released this week, and quarterly earnings reporting will continue. Any or all of these events could move the market in a major way. Next week also marks the start of trading in a new month, and historically November has traditionally been a very strong month. Certainly, all stock investors would welcome a strong November and embrace the start of long upward market trend. In industry news, all sectors shared in the good fortune last week with all showing positive gains. Basic Materials and Capital Goods had the strongest weekly gains at 17.25% and 15.62% respectively.

Our Strategy: Avoid Panic Sells, Great Prices, Increase Investment

The stock market volatility and performance in October was painful, although the performance last week did bring relief and hope. The selling pressure in October was extreme and volatility hit record setting levels. However, over the past few days, volatility did subside, perhaps a sign that fear levels are decreasing. Lower volatility is critical to bringing investors back to the market, but lower levels are needed over sustained periods before buyers will return in mass. There were positive developments last week with declining oil prices, lower credit rates, and rising new home sales. Yet in sum, there were more economic negatives with falling GDP, historically low consumer confidence, declining spending, and jobless claims that continue to rise. But the stock market was able to rise strongly last week despite the negatives, something it has not been able to fight through recently. In addition, we were encouraged that the market was able to hold onto the strong gains made early in the week. We are hopeful that a support base is forming at current price levels, but ideally want to see that base sustained over a longer period in an environment with lower volatility. We are now more optimistic that we have either hit the stock market bottom or that we are very close. The selling pressure subsided last week and the pressure from fund redemptions and tax selling may mostly be over. That should give the market greater resiliency for absorbing bad news. By historic standards, November is usually a good month and we think that may hold true this year barring some major unforeseen event. Overall, we still think that the economy has a long way to go before it gets better, but we do think that equities have hit very compelling price levels. In our view, now is not the time to exit the market. You should only sell a stock if you truly have a better stock investment. In addition, we plan to gradually begin investing some of the cash we have on the sidelines. For those that are sitting mostly on cash, now may be a good time to gradually reenter the market by investing a portion of that cash each month. Investors will reduce their risk over market timing if they allocate portions of their available cash over time. Do not try to wait and catch the market bottom as you will surely miss it! Despite very tough conditions, all of our portfolios continue to show positive returns since their inceptions, which is truly exceptional given that the corresponding market returns all show significant losses.