Welcome to our monthly audio newsletter for October.
This month saw a rebound after one of the worst quarters in market history; the July to October period was down 14%. Our model has had us out of the market mostly since mid-June so even with the comeback in October, the market is still lower than it was in May and we really haven’t missed anything. Let’s look at October, I think the 10% increase is due to a couple of factors; first, even though the debt problems in Europe were not solved, there were no significant new developments and fear turned to optimism that a workable solution is possible. I think that as they continue to work through this issue and as time goes by and they didn’t have a complete collapse of the system, we have become somewhat desensitized to all the negatives. Same with our U.S. debt problems. Remember in the summer when we had our backs again the wall and needed to increase the debt ceiling by August or risk defaulting.
We were conflicted by two unattractive choices: first, to either print more money, or to cut government spending and risk what that would do to the economy in a struggling economy to begin with. Miraculously, even with our backs against the wall, we did virtually nothing. Cutting only less than 10% of the 9 trillion dollars we’ll spend in increases scheduled over the next 10 years. And yet the world still seems to resolve. We’re still able to buy groceries and gas and still drawing pay checks and Social Security. As bad as things seem, yet again, this is not the end of the world as we know it. As this crisis; our debt and the Euro debt have not taken us completely down. We’ve grown calices and gotten used to the issues. What was really forgotten through all of this is the fact that the S&P companies are doing very well profit wise. Stocks are very cheap relative to historic measures, trading at about 11 times earnings where the average has been about 16.
We still have significant problems but the market seems to think that we’ll be able to digest them, at least for the near future. Looking back at January 1, year to date, the market is pretty much right where it started. So where do we go from here?
As of November 1, we are adding two equity positions and back in the market about half of what we might be total in the equity allocation. If we can keep the bad news at bay, we should see the markets move up and we’ll be cautiously getting back in to a higher degree than where we are right now. That doesn’t mean that we won’t still have issues and problems. In 6 months we could be out of the market again. We’ll let the software direct us on that.
So, going forward, I still think that we could still see some volatility in the market and we’re likely to see some emotional reactions to any bad news but the market seems, overall, willing to mostly shrug off the bad news. As always call or email us with any questions or comments. Thanks for putting your trust in us.