The stock market moved up strongly in the 3rd quarter of 2010.After moving higher in July and selling off in August, stocks had their best September in 71 years. The result was that all indices turned positive year to date. The S & P 500 Index was 1,141 on September 30, 2010, up 2.3% year to date.
3rd Quarter Results and Our Strategy:
A rocky start: We had started the quarter on a positive note as the market responded to good corporate earnings reports.This was reversed, however, in August when fears of an economic slowdown basically wiped out all July gains.Fears receded in September as investors viewed a double-dip recession as unlikely leading to the strong gains for the month and the quarter.
Bonds and Gold Benefited: Economic and political uncertainty continued to dominate the markets in the third quarter.This led to a further exodus of small investors from the stock market even as money poured into bonds and gold.Since 2009, much more money has been funneled into bonds ($620 billion) while stock funds have actually seen a net outflow ($100 billion) of cash over the same time frame.Corporations have been selling bonds at a furious pace with record levels of cash in their coffers.This has led many to believe that these companies will start ramping up the purchase of their own stocks which will help markets continue to the positive side.In addition to share buyback plans, these dollars can be used to increase dividends given to shareholders. However, dividends actually were decreased after the financial crisis.
Tax Uncertainties: Now many investors are looking to the November elections to resolve uncertainties about U.S. tax policy.Tax issues not only affect individual tax rates which expire at the end of this year but also the rates on dividends and capital gains which will go up also if nothing happens in Congress.
Fed Expectations: The third quarter rise was fueled in September by one of the factors that had led to the second quarter selloff: the struggling U.S. economy.With unemployment at 9.6% many now expect the Federal Reserve to again inject money into the system through purchase of U.S. Treasurys in order to again pump up the economy.
This "quantitative easing" had been done in 2009 and resulted in the reflation of stock, bond and commodity prices.Some investors were betting on a similar tactic and result in the near future which helped propel prices forward in the quarter.Expectations for more quantitative easing helped lift Treasury bond prices despite concerns that there may be a bond bubble occurring.Talk of this bubble was fueled by the amount of money pouring into fixed income.
Gold: Besides bonds, the other destination for many investors was gold which rose to a new all-time high of $1,309 per troy ounce.Some see gold as a safe haven in event of another financial meltdown.Others are worried about the long-term inflationary implications of additional Fed easing, massive government debt and budget deficits.
My Strategy: As the markets nosedived in August, I moved some dollars out of the equity area into bond funds for safety reasons.These bond funds have been a good investment in 2010 and it does not hurt to have this protection as we move into the fall. - Bruce A. Kraig, MBA, CFP
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