Market

Insights

For the past year or so we have opined that we are in a secular bull market which may very well have many years left to run. It has also been stated that during these cycles market values tend to correct every four or five years. Since the beginning of this year the expectation of a 10-12% correction happening sometime this year was very real due to historical odds. With volatility returning to the major market indexes this past week, the question quickly has turned to “are we in a bear market”? To be sure, market moves of more than 1.5% both up and down every day since last Tuesday, investors have become very nervous. In actuality though, the S & P 500 is down 6% from its all-time high less than one month ago.

What a difference a month or so makes in the markets today. Towards the end of May, we printed that the small company stocks and technology were taking a beating in relation to their larger issues. Since then, the smaller caps have raced back near their all-time highs.

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The volatility we have seen in the markets over the past month can be chalked up to what analysts call “sector rotation” This occurs when one sector that has generated large gains over the recent period suddenly becomes overvalued in the eyes of traders, and is sold off in a concerted effort to lock in profits. These periods of momentum can last for months or years until, without warning, they are hit hard by profit takers.

Equity markets here in the States have recently reached all-time highs once again. The time for the naysayers has begun again with predictions of another major decline in stock values. The analysts we follow and communicate with do not see a significant drop in the near future. In fact, the next few years look quite positive to the majority that we talk to. No one ever knows for certain what short term gyrations will occur. The following excerpt taken from one of the greatest investors of our period is very timely. We hope you enjoy the comments.

As another year ends, we look back and reflect on a year that many thought would be tough for the markets. Equities started off the year moving higher and except for a slight pullback in June due to the Federal Reserve’s comments about stopping their quantitative easing program, continued to make new highs right into this year’s end. Declines due to worries over inflation, Syria, Iran and the various political scandals never materialized leaving the majority of investors sitting on the sidelines missing the year’s gains.

History once again repeats itself. Just like the previous 17 times that the government went down to the wire on a monetary shutdown this time was no different. Just before midnight on Wednesday the President signed the bill to re-open the federal government and increase the debt limit. At least for 90 days. After grandstanding in front of the television cameras for the past two weeks, Congress miraculously comes to a weak agreement to again kick the proverbial can down the road. The American people have seen this movie too many times and appear to be signaling that just maybe they’ve had enough.

As we come into the month of September there is continued reason for caution in the short term. From the high of 1,700 on the S & P 500 index on August 1st, we have seen a decline of about 4% down to 1,632 on August 30th. Trading has been listless with fewer trades even on the days where values are up.

Our last e-mail just a little over a month ago commented on the fairly quick rise to new highs in the stock market. It is looking like our Federal Reserve Chairman, Ben Bernanke, began to feel like the rise to new highs was a little too quick. We have heard that the timing of last week’s Fed meeting comments suggesting that he may soon taper off the buying of bonds, which has kept interest rates low, was meant to bring market levels down a bit. Obviously with China’s economy slowing and ours just barely chugging along, there is zero chance that the Fed will actually stop pouring money into our economy any time soon.

Equity markets are in the news daily again since they have reached new highs. All of the attention is bringing comments of caution from investors who have been burned after seeing major corrections from previous market highs. For reasons that we have mentioned in previous communications and also in this letter, there is strong evidence that prices can move much higher. This optimism though, does not keep us from continuing to explore new ideas for investing and diversifying to help reduce volatility looking forward.