Q3 2011 Economic and Market Review

Q3 2011 Economic and Market Review

The dominant theme for the third quarter was flight to safety, with bonds generally rising and stocks falling sharply.  In an environment marked by particular concern about the Euro-zone, both the US dollar and Japanese yen were sought as safe havens by investors.

Most US bond indexes delivered positive numbers, with results ranging from approximately +3 to +6%. Notably, long-term US Treasuries benefited handsomely from the implementation of Operation Twist, the Federal Reserve’s program to sell short -term and buy long-term government debt.

Within US equities, the typically riskier small caps were down more than large caps.  As well, international equities, encompassing emerging and developed markets, underperformed the US market. While the MSCI All Country World ex-US Index retreated -19.78% for the quarter, the drop in the US S&P 500 Total Return Index was smaller at -13.87%.

Commodities and real estate also lost ground.  The DOW Jones UBS Commodity Total Return Index ended the quarter down -11.33%, while the FTSE NAREIT All Equity REITs Total Return Index fell -15.07%.

Challenges Facing Europe

Much of the risk aversion in the equity market can be traced to continuing economic challenges in Europe.  In particular, Greek default remains a possibility; Spain and Italy are both financially strained; the European financial sector is under stress; and European companies in general are warning of “shortfalls.”(1)

These hurdles, however, are not insurmountable.  The European Union may successfully expand the available capital needed to stabilize various countries and put plans in place that could support growth.(2)  And when assessing potential outcomes in Europe, it is important to keep in mind that “there is more room for monetary stimulus in Europe.  The European Central Bank (ECB) actually raised rates [recently]… and it could certainly cut rates by quite a lot.”(3)

Grounds for Optimism in Asia and the US

There are also bright spots in both Asia and the US to consider.  Despite signs of slowing in global growth, which can threaten exports, “Asia still has much more policy flexibility than the developed world.”  And much of the slowing in China over recent months can be attributed to “very aggressive tightening measures,” which, if unwound, could allow China to help boost global growth.(4)

While US unemployment remains stubbornly high and GDP growth has not yet accelerated, corporate earnings growth has been exceptionally strong.  Good companies are making money, and ultimately that will have a positive impact on the stock market.  Other positive developments in the US include healthy new car sales in September and an unexpected climb in construction spending in August.  As well, “the Institute for Supply Management said its index of national factory activity rose to 51.6 last month from 50.6 in August, boosted by a rebound in production and increased factory hiring.(5)

Looking Ahead

Ned Davis Research (NDR) believes that the fourth quarter is likely to usher in a market rally, noting that the fourth quarter tends to be the year’s best.  The positive side of volatility is that it can create investment opportunities.  NDR notes that “after declines of at least 14%, the S&P 500 has tended to rise substantially, by a median of 12% over the next year.”(6)

On the other hand, it is possible for a recession to be touched off by negative expectations and “if the fears in Europe are justified… contagion will accelerate globally.”  Nevertheless, even in Europe NDR does not see recession as inevitable.(7)

Of course, no one can predict the future.  That is why we continue to implement “strategy diversification” as a means of constructing a well-positioned portfolio – positioned to capture potential upside while seeking to diversify away some of the downside risk.  We continue our efforts to reduce wealth-eroding volatility, high levels of which can adversely affect investment return, not to mention an investor’s comfort level.  The flexibility in the ability to navigate between secular (long-term) bull and bear markets is fundamental in this approach and I believe this is essential in navigating today’s volatile markets.

 As always, if you have any questions please don’t hesitate to call or email at any time.

Sincerely

Robert O’Braitis

President

Chief Financial Strategist

Lansdowne/Boca Raton

Private Wealth Management

703-724-9499

Bob@LPWMGROUP.com

[1]Ewen Cameron Watt, et al, “Recalibrating Investment Strategies After a Summer of Volatility,” BlackRock Special Market Update, September 12, 2011.

2Bob Doll, et al, “What’s Next for the Global Markets?” BlackRock Special Market Update, September 27, 2011.

3Robert Scherfke, PhD, “Watch the World: Markets Versus Policy,” Wellington Management Viewpoints, September 2011.

4See footnote 3.

5Lucia Mutikani, “Manufacturing may help fight off new recession,” Reuters, October 3, 2011.

6Ned Davis Research, Inc., “Benchmark Review: Q3 Was Bad. Is that Good?” Chart of the Day, October 3, 2011.

7Ned Davis Research, Inc., “Recession Questions,” Investment Strategy, September 2011; “Expecting a Better Q4,” Stock Market Focus, October 2011; and “Markets Bottoming or Breaking Down—Likely to Recover,” Chart of the Day, September 13, 2011

This information is being provided as a courtesy of Robert O'Braitis, Financial Professional, AXA Advisors, LLC. Any opinions expressed in this article will not necessarily be those of AXA Advisors, LLC. AXA Advisors, LLC is not a legal or tax advisor.  Robert O'Braitis offers securities and investment advisory services through AXA Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC. Insurance and annuity products are offered through AXA Network, LLC and its subsidiaries, an affiliated insurance general agency.  Robert O'Braitis, AXA Advisors and AXA Network do not guarantee or accept liability for its accuracy.  Lansdowne Private Wealth Management is not a registered investment advisor and is not owned or operated by AXA Advisors or AXA Network. This information should not be construed as institutional advice. All economic and performance data is historical and not indicative of future results. Diversification strategies do not guarantee a profit or protection against loss in a declining market. AGE 65779 (10/11)(Exp 10/13)