The Dow’s at 10,000… What’s next?
This is the question on everyone’s mind.
WHERE ARE WE NOW?
The market’s recovery from March lows was well deserved, especially given the sequential improvement we’ve seen in quarterly earnings from the low of the 4th quarter in 2008. (At this time the market is down 31.9% from the October 2007 high.) Companies did a great job of cutting costs (unfortunately at the expense of laying off millions of workers) and it has shown in their bottom line. At the same time hedge funds are reversing short positions and mutual funds are reluctantly putting money back in the market again.
We believe the market has the underpinnings to stay at current levels with a 10% band on the upside and downside. 4th quarter 2009 earnings will still look good on the surface, the Fed will continue to be accommodating and the euphoria from the Dow reaching 10,000 will keep us afloat
Before we all start jumping for joy let’s take a look at some of the realities that still abound.
While the market has moved higher, net inflows into equity (stock) mutual funds are still negative while money flows into bonds are positive. Why? My guess is that people are still hunkering down. They want security but lost jobs and employment insecurity means they are not getting it. Consequently they are not spending but hoarding whatever money they can.
We also need to keep a watchful eye on the banking system as many loans on commercial properties are coming due next year and need to refinance. This will be a huge problem for banks since the value on some of these properties is less than the loan amount.
* How will they handle it?
* Will it continue to negatively affect their lending to small businesses and consumers?
* Will some go out of business?
* Will companies continue to post good earnings once they cut expenses to the bone?
These are just some of the many unanswered questions for next year.
We believe that, at some future date, we will be in a bull market again. The true bull revives when the individual investor:
* Gets tired of near 0% interest rates in their money market funds
* Feels their job is more secure
* Starts spending again
* We have a more stable banking system that is willing to lend.
HOW ARE WE MANAGING THESE MARKETS?
CAIM realizes that clients still want to preserve capital and grow it at the same time. We’ve been slowly moving back into the market this year and aim to keep a small cushion of cash in portfolios, in case of a larger than expected market drop.
For those of you with questions, feel free to call me at 203.966.2712.
This information is copyrighted October 2009
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