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Market volatility, corporate takeovers headline turbulent quarter
This Market Recap for the month ended Sept. 30, 2008, was provided by Scott Olson, Investment Relations
As you’ve been reading the last couple of weeks, the mood on Wall Street has grown increasingly somber. The credit crunch continues to take down well-known investment banks, including Merrill Lynch and Lehman Brothers.
Individual investors also have felt the impact, with large banking institutions (Washington Mutual, American International Group and Wachovia) and mortgage industry giants (Fannie Mae and Freddie Mac) taken over by U.S. government regulators or acquired by larger corporations.
Added to the continued woes in the housing market, all of this negative headline news has shaken the markets and left investors wondering when the situation will begin to stabilize. In our opinion, many investors are now pinning their hopes on some sort of overarching government “bailout” program to help calm the markets.
Stocks officially in ‘bear market’ territory
The heightened market volatility has now been with us for more than one year, beginning in early 2007. Stocks are now officially in “bear market” territory, typically defined as a decline of 20 percent or more from the peak. And the Dow Jones industrial average’s 777 point decline on second-to-last trading day in September, the largest single-day point loss in history, punctuated a difficult September for the stock market.
While weary investors may be reeling from the sell-off, given that it has taken place over the course of several quarters, results for the third quarter of 2008 were not all that bad. While the S&P 500 Index of large-company stocks fell 8.4 percent during the quarter, its fourth straight quarterly decline, the Dow Jones industrial average lost a more modest 3.7 percent during the quarter. Results were worse internationally, with the MSCI EAFE Index of developed market stocks and MSCI Emerging Markets Index of developing economy companies, were down 20.5 percent and 27.5 percent, respectively, during the quarter.
Changes in financial and energy sectors may surprise investors
While broad market returns in the third quarter were disappointing, some investors may be surprised at the performance of some sub-segments of the market, namely the financial and energy sectors. Financials were nearly unchanged, with the S&P Financials Index losing a meager 0.1 percent, while the S&P Energy Index, a formerly high-flying sector, declined nearly 25 percent during the period. We believe that stabilization in the financial sector is critical to improved investor confidence and better market performance. The weakness in energy is likely a reflection of slower demand for commodities as economic growth slows around the world.
Inflation, which until recently was a chief concern among investors as indicated by the federal funds futures market, has now taken a back seat to the credit market crisis. Many institutional investors now believe that the Fed may have to cut rates to help support the economy. Yields on U.S. Treasury bonds have fallen since mid-2008 as a result of this changing view, but in our opinion, more so as investors once again flocked to the perceived safety of treasuries despite their very low yields. Corporate bonds and stocks experienced huge investor outflows during the quarter, driving down prices, with Treasuries and retail money market funds seeing most of the inflows.
The safety of all money market funds was called into question by the financial news media and investors late in the quarter. Massive redemptions and liquidity issues forced the net asset value of Primary Reserve Fund, an institutional money market fund, to fall below $1.00, thereby “breaking the buck” and limiting redemptions to its shareholders. Investors worried that retail money market funds would suffer the same fate, so the U.S. government instituted a temporary voluntary insurance fund for registered money market funds, hoping to quell fears of additional failures.
A few bright spots
While it is understandable that many investors are discouraged with nearly all of the news reported by the financial media seeming to be negative, there are a few bright spots that should be remembered. We believe that corporate America, excluding financials and autos, is in generally good shape. Consumer confidence has shown signs of improvement, and the recent reports indicate that housing market has begun to stabilize in several large metropolitan areas around the country.
While the government’s “bailout” package and an easing of the credit market problems are very important to restoring confidence among investors and institutions, in our opinion, we would encourage concerned investors to remain thoughtful about their investment programs and not make knee-jerk reactions to the gyrations in the markets.
Investors should be prepared for further market volatility
We firmly believe that opportunities are often found when conditions look bleak and are encouraged that Warren Buffett, one of the world’s highest-regarded investors, has been on a buying spree recently. His investment vehicle, Berkshire Hathaway, has spent over $12 billion in the past two months. Being in the market is essential to participating in its eventual recovery. In the meantime, investors should be prepared for further market volatility. We would encourage investors to work with their financial representative who can be of assistance in positioning their portfolios in an attempt to meet their short- and long-term investing goals.
Securities offered through Thrivent Investment Management Inc., 625 Fourth Avenue South, Minneapolis, MN 55415-1665, 1-800-THRIVENT (800-847-4836) a wholly owned subsidiary of Thrivent Financial for Lutherans. Member FINRA. Member SIPC.
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