Boomer Sooner

- 2006 3rd Quarter


Normally, I spend my Saturday afternoons in the fall cheering for my favorite college football team, the Oklahoma Sooners.  Having grown up in Oklahoma, one of the first things that every child learns is the school fight song called, "Boomer Sooner”.  As the 3rd quarter came to a close, and it was time for me to write the market commentary, I kept thinking that the market went "Boom" a lot "Sooner" than expected.  With that idea in mind, and knowing that you can take the boy out of Oklahoma, but you cannot take Oklahoma out of the boy, I have titled the 3rd Quarter Market Commentary "Boomer Sooner".

When I wrote the 2nd Quarter, 2006 Market Commentary titled "Derailed", the main theme was that a lot of things had gone wrong, and as a result the market took a step backwards.  I also wrote that my expectation for the 3rd Quarter was much of the same, with the thought that the market would surge ahead in 4th Quarter.  When looking at all of the negatives we were facing at the end of 2nd Quarter, it appears that the stars must have all been aligned perfectly for us to have the 3rd Quarter we experienced. 

Second Quarter factors which led to 3rd Quarter surprises were as follows:

  • The Federal Reserve & Interest Rates:  The Fed had raised interest rates 17 consecutive times over a little more than a two-year period.  While we had believed that the Fed was nearing the end of their interest-raising run, our expectation was that they would raise interest rates for an 18th and final time.  Even after raising it 17 consecutive times, most in the industry were shocked when the Fed did not raise interest rates.    The initial thought was, did they get it right?  But, at their next meeting in September, they confirmed their earlier message by again not raising the rates.

    With the help of our trusted ally, Dr. Ken Mayland, we have stated for some time that when the Fed stepped aside and interest rates leveled off, the market would be poised for a nice run.  For the last 2+ years, we have said that The Fed is a major straw that stirs the market.  Thus, it was no coincidence that shortly after the Fed halted interest rate changes, the market improved significantly. 
     
  • The Pumps:  At the same time that the Fed was making their announcement, a funny thing happened at the pump.  In recent years, we have become accustomed to rising oil and gas prices.  Very soon after the Fed failed to raise rates, oil and gas prices rapidly started to fall, with oil falling below $60 a barrel and gasoline prices sliding to under $2.00 a gallon.  This stimulus, on top of the Fed stepping aside, has given us almost ideal market conditions.
     
  • 3rd Quarters in History:  Another item that caused us concern is that historically 3rd Quarter is the worst market quarter of the year, and August is the worst month of the year.  As a result of the above market situations, history was ignored and we posted one of the strongest 3rd Quarters ever.  For the Quarter, the S&P 500 was up 5.67%, and the year-to-date figure as of September 30th was +8.53%.  If you recall from my earlier commentary, with all the market factors and the history of 3rd Quarters, I was hoping for a break-even quarter to be followed by a surging 4th Quarter.  To say that I was surprised by the results is a huge understatement.
     
  • Natural & Man-made Disasters:  Other factors that contributed to 3rd Quarter predictions were hurricanes as well as terrorist threats.  After the worst cumulative hurricane season in 30 years during 2004, and with the devastation of Katrina during 2005, the so-called experts were preparing for the worst.   As it turned out, other than a few small tropical storms, there was nothing of any significance in the quarter or year-to-date for 2006.  Further, the plot to take over planes from London to New York had all the makings of another 9/11.  We were lucky as a nation and an economy to have snuffed it out before it happened and spoil the terrorists’ plot.  Since 9/11, it is apparent we are living in a much different world and we must always expect the unexpected.  The economy, however, pushed forward with no destructive acts of man or nature to negatively affect it. 

What Now? So, now that we are feeling confident after a strong and surprising 3rd Quarter, what does it all mean for the 4th Quarter?  All indications continue to point toward a strong 4th Quarter, which if everything falls into place as expected, will result in a better-than-average market return year for 2006.

The Fed concluded their most recent meeting on Wednesday, October 25th, which was their annual 2-day meeting.  As expected, the Fed again decided to leave interest rates unchanged.  They have one remaining meeting late in 2006, and while most believe they will leave interest rates unchanged, there is the chance that they could return to their rate increasing ways.  If this should happen, this would impact the market in a negative manner.  However, most believe that they will stand still for the remainder of 2006, and into 2007.   Oil prices have risen slightly, but that is more to do with the fall and winter season than any concerning market event.  

The National Congressional elections take place in early November.  Most market analysts believe that the best thing about elections and election years is when the elections are over.  There has been great speculation about congressional turnover, and the best thing from a market standpoint will be to have the elections in the rear view mirror.

The naysayer in me likes to ask the question: “Where can things go wrong?”   Maybe the answers lie in the following:

Terrorism - While we cannot live in fear we must continue to live on guard. It has recently come out that North Korea has tested nuclear weapons underground.  Does this necessarily mean anything imminently?  Not likely, but it is just another measure of how unstable or volatile the world around us is.  A few weeks ago, New York Yankees pitcher, Cory Lidle, was killed when the plane he was in accidentally crashed into a building in New York City.  My initial reaction to hearing a plane had struck a New York City high-rise was a sickening feeling of 9/11 all over again.  While that was not a terrorist attack, we must keep the thought of it in mind especially as we invest and potentially near retirement. 

Our overall outlook is very good.  Even our economic guru, Dr. Mayland, believes that there is still some time left (6-24 months) on the current growth of the market. 

During the 3rd Quarter, the Dow hit its all-time high.  What this means is that if you lost money during 2000-2002, and did not change your investment allocation, you have finally recouped all of your losses.  Now may be a great time to take inventory as to the state of your accounts and to make sure you are investing based on your current suitability of age, time horizon, and risk tolerance.  If you have not made that change previously, you want to do it while sitting on top of the market, not while you are looking up at the market.  Another key point to consider during the Dow's all-time high level is that while we are excited to be here, and believe we have more room to grow, we have learned the hard way that the market will not go up forever.  Now is as good a time as ever to make sure that your portfolio is built for all seasons.

It has always been the intent of Pension Advisors and AdviseMe!® to do everything within our power to put participants in the best possible financial scenario for their retirement.  AdviseMe!® was created with a built-in, systematic game plan that reduces and controls risk using Model Portfolios.  Our ultimate goal from a return standpoint is to do well during good markets, and to do really well during the bad markets.  Through our processes and testing, we remain very confident that we are achieving these results.  While the intent of this commentary is to give a market overview, we must continue to remember our overall objective:  financial security in retirement.  

We have continually stressed at Pension Advisors that we are not trying to make our clients into investment experts or retirement experts.   That’s what we are here for; so if there is anything that we can do to help you achieve your retirement or investment goals, please do not hesitate to contact us.  We appreciate your continued support of AdviseMe!®, and look forward to working with you in the future.


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