The expression "Indian Summer" is used to describe an unseasonably warm fall day. This phrase came to mind as we reflected on the third quarter. During September 2010, the Market was really hot. The S&P 500 Index was up 8.9% (BTN Research), making it the best September since 1939, and the fourth best overall month in the Market over the last 20 years. On top of the positive market news, it was announced on September 20, 2010 that the "Great Recession" ended on June 30, 2009. This "Indian Summer" turned around a gloomy year and made us optimistic about the 4th Quarter of 2010.
The questions many are asking as we head into the 4th Quarter are twofold: (1) why was the market so good in the 3rd quarter, and (2) is this something that can be sustained?
The "why" can be attributed to two main factors. The first factor is the emergence of a "new" international market. This new market category is described as Emerging Markets. The emerging markets are found in emerging economies. The demographics of countries such as India and Brazil position them as being outperformers for the coming months. China's economy is growing at such an incredible rapid rate that it is providing global relief. Reports surfaced in the third quarter that China's middle class, which is synonymous to being in the upper middle class in the U.S., has swelled to the point that it exceeds the entire U.S population. This has a significant effect to the U.S., which leads us to the second factor: the success of big business domestically and the pro-business mentality that is occurring domestically.
Big business, the engine that shapes our market and economy and run the country, has done very well in the 3rd Quarter. Of the 500 stocks that make up the S&P 500 Index, 204 are up at least 10% YTD through 9130110, while 81 stocks are up at least 25% YTD (NASD 100.com). In addition, with the upcoming mid term elections, there is a pro-business or "Republican" mentality that creates optimism for the year ahead and hope for some additional tax incentives for businesses.
With all of that said, there are still some significant issues that need to be dealt with before we can celebrate a renewed economy. Unemployment is still hovering just under 10%, and recent projections estimate the problems will persist until 2015, meaning that the current unemployment problem will be a long-term problem with no quick fix in sight. The second issue has to do with real estate, both commercial and residential. The national average vacancy rate for commercial property is 17% (Reis, Inc.). The two highest cities' vacancy percentages are in Detroit (at 43%) and Cleveland (at 38%). Problems also persist for the residential real estate market. Real estate inventory remains high with little to no new homes activity. For the 5th consecutive year, the average home value nationally is worth less than it was each of the previous 5 years. Domestically we are struggling with the continued stubbornness of banks to loan money to businesses and individuals. With banks still writing off their losses, few know thatthe Federal Reserve in 2008 started paying banks interest on excessive reserves. This is a risk-free way for banks to make money and unfortunately eliminates any incentive to increase lending activity. This interest is expected to be eliminated within the first 6 months of 2011. Hopefully, this will force banks to get back into the lending business. This will be the best news for the economy and the Market.
As we head into the 4th Quarter, can we expect the Market to sustain the growth we saw in the 3rd Quarter? Even though we will have the continued problems of unemployment along with the volatility we anticipate in the Market, we do expect that the 4th Quarter will be positive. The 4th Quarter has been up an average of 4.6% over the last 20 years (BTN Research). If we can add that same return to the 3.9% YTD return we had as of 9130, the S&P 500 should finish the year a bit higher than the 4-6% we predicted at the beginning of the year. That would end the year on a nice note.
The forecast for 2011: We foresee good things from the Market as we continue to heal. The mid-term elections are just around the corner. Expectations are that there will be tax cuts, which will give additional enhancements to the ''big business" companies of the S&P 500. The positive impact will trickle down to small businesses in 20 11. Next year will also mark President Obama's third year in Office. We hope that history repeats itself - the Market has yielded a positive return in every Presidents' 3rd year dating all the way back to 1939. Moreover, the average return in the 3rd year of each President's term has been 22%.
As we are taking the turn into the 4th Quarter, we offer our services to you. If you want to check your account to ensure it is satisfying your goals, and/or that you are contributing enough, please do not hesitate to contact us.
Latest Updates & Information
International Markets continue to be the most favored area of investment for the first quarter of 2018 and looking forward for the next 12 months. The best performing asset class in Q1 was emerging market.Read full story here
Recent allocation changes have yielded good results in 2017. A greater exposure to International Equities turned out to be timely. There is still room for normalizing this allocation if you have not done so yet.Read full story here