What to do?

Many times it seems that “action” is better than no action. When we see things happening around us we want to “do” something. Recently the stock market has moved up quite nicely and you begin to wonder “did I miss the boat?” I do not have a crystal ball but I have been saying for several months that you need to have a game plan that makes sense rather than reacting to the stock market. The game plan I am pursuing is one based more on historical information than on what is happening with the stock market day-to-day. Historically the month of September is the worst month for the stock market. I think this occurs because investors realize that while gimmicks and onetime adjustments (such as lowering employees pay or not buying equipment now that you know you will need later)can work in the short-run you cannot build business profits using these methods. Ultimately, growing profits move stocks higher. The expectations in the first and second quarter for earnings is fairly small. By the time you get to third quarter earnings the expectation is much greater. Third quarter earnings are the last earnings we will see for the year since year-end earnings are not reported till the following year. It seems that the worry about what the third quarter results will show tends to drive the stock market down. Will that happen this year? I don’t know what will happen in the future but I don’t think you want to increase risk in your portfolio at this point in time. Ed Mallon

Stock Performance

Since the March 9 low in the stock market, the market has risen almost 50%. If you had invested $1,000 at the beginning of 2008 and that fell to $500 by March 9, between then and now you would have gained about $250 (50%) and be back to $750. That is still 25% below where you started, but it’s a lot better than where you were on March 9. This stock market is up 49% in five (5) months. To say that this is unprecedented is to put it mildly. You have to go back to the early 1930s market rally to find when it last happened. Of course, that rally was followed by a decline through 1932 that led to prices being down about 82%. I don’t want to burst anyone’s bubble but it appears to me the stock market is ahead of itself. Consumers account for about 67% of the spending in the economy. Currently, many consumers are out of work. It is unlikely that they will increase their spending. An article in today’s Wall Street Journal, “Debt Burden to Weigh on Stocks,” indicated that: “. . . household indebtedness peaked in 2007 at 132% of disposable income. That was the highest level since the end of WWII and quadruple the 36% of 1952. By the end of March, with families boosting savings, repaying debt and defaulting the ratio had fallen to 124%, a tad lower but still miles from the level of, say 69% in the middle of 1985.(WSJ,pg. C1,08-10-2009)” Consumers are not borrowing but are paying down debt and saving. If that is the case, how is the economy going to grow? How are corporations going to see profits increase? When will companies begin to create new jobs? I have to agree that we are better off now, than, say, last November when things looked bleak. But are we so much better off that the stock market should be up 49%? In a news story today on Bloomberg.com, the reporter indicated that Mark Mobius at Templeton is expecting a 20-30% correction in the market. They also report that Warren Buffett is shifting out of equities and into U.S. corporate bonds and foreign government bonds. These are two very astute investors who manage a lot of money. If the market declines 20 - 30%, it will not be down as much as it was on March 9, but it still would bring us close to that point. If we take the $750 that we now have from our original $1,000, a downturn of say 25% would leave us with $563. Of course, the future will tell all, but for now I would not get carried away buying equities. Ed Mallon