Rising over eight hundred points in five weeks, the Dow Jones Industrial Average peaked July 22, at 12,724, nearing the closing high for 2011, set April 29. Thoughts of second half economic strength quickly evaporated, however, as Congress and President Obama clashed over raising the U.S. debt ceiling, clearly demonstrating why the public continues to lose faith in “big government.” Also, for the first time in history, Standard & Poor’s downgraded the U.S. credit rating, which only added to market and economic uncertainty. By quarter end, dual concerns of a European financial meltdown over sovereign debt, and the banks that hold it, coupled with increased rhetoric about a double-dip recession in the United States, spooked investors.
At the closing bell on September 30, the Dow closed at 10,913, a decline of 1,800 points from the July high, and down 12 percent for the quarter. The S&P 500, another proxy for large cap stocks, though broader based, was down 14 percent. Depending on the index used, mid cap stocks were down 19%-20% and small caps fell 20%-22%. Surprisingly, given fear of a recession, large cap growth outperformed value, but not in the smaller indices. All major large cap sectors were down, except utilities, which saw a modest increase of 0.4%. Consumer Staples (-4.9%) and Technology (-8.0%) were the other top performers. The worst performing sectors were Materials (-25%), Financials (-23.1%) and Industrials (-21.5%). Energy, which we view positively for income and long-term gains, was down 20.9%.
Although gold rose 8.2% in the quarter, it was not the safe haven many had counted on. From the August 22 all-time high of $1,979.9 per ounce, to the quarter’s close five weeks later, gold dropped $358 or 18.1%. By the end of the quarter most all asset classes had sold off, save U.S. Treasuries. Despite their downgrade, and not seen since the Lehman collapse of 2008, investors sought the ultimate in safety, pricing the ten year U.S. Treasury bond to yield a meager 1.93%.
Similar to taking bad tasting medicine, market corrections like this do provide opportunity for the future. An important component of investment management is not merely raw performance, but also tax planning. Price declines allow for losses to be taken so to offset future gains. Granted, this strategy cannot be implemented in retirement accounts, but even there, opportunity may exist to upgrade a particular holding due to this market decline. We will look to be making these kinds of adjustments between now and year end.
In the absence of uncertainty, the market generally rises. With uncertainty, though, investors require lower prices to compensate for the added risk. There has been much uncertainty in the markets of late. Will the economy fall back into another recession (we don’t believe so), will Greece (or Spain, or Italy, or Portugal, or Ireland) default on their sovereign debt (we believe at least one will), what will the political landscape look like a year from now (more favorable after November 2012), and so on? We are putting the finishing touches on a piece titled, “The Other Side of the Valley.” It will put recent events in a historical context, which, we believe, provides a glimpse into what could be a profitable future. It will be mailed to you and be available on our website.
Thank you for your patience, but more importantly, your trust during this difficult period for the market.
