December Market Update

11Dec10

As we have now entered the last month of the year, we wanted to reach out and share a few thoughts.

The month of December is historically the best month of the year for the financial markets, which typically experience a “Christmas rally”. Even in late 2008 amidst the mess of the financial crisis, December returned over 10% in the major indices.

Many have remained nervous throughout this year, fearful of a double-dip recession. However, our firm has remained bullish during this period. Remember this one thought whenever the markets show signs of volatility, and produce negative returns: crisis creates opportunity.

Even though new jobs numbers were far below expectations on Friday, last week’s economic indicators provided additional underlying strength and positive signs for the equity markets. For one, the Beige Book (economic report covering 12 districts across the U.S.), reported positive signs across the board for the second quarter in a row. We also saw positive flows into bond markets come to a halt (after 101 straight weeks), indicating a potential shift of confidence, favoring equities.

The Fed recently began injecting an additional $600 billion (QEII) into the economy, buying U.S. Treasuries. This further monetary stimulus will continue to hold interest rates artificially low, while the economy recovers, encouraging investors to buy the market. Think about this. Would you rather by a 10 year Treasury yielding a 2.9% return or a blue chip company like IBM, which is paying a 4.7% dividend while still offering you the growth potential of a very solid company? That isn’t a trick question. There is huge value in the equity markets today.

Bottom line, we remain extremely bullish for the end of the year and 2011. All economic indicators continue to improve. Home sales are up 10% from a year ago, stock upgrades on many of the big banks (Citi, Goldman Sachs, Bank of America, Wells Fargo, etc.) look to be an indication of new stability in the financial sector, and consumer confidence is beginning to recover. In fact, consumer confidence is also up 10% from a year ago at 54.1, matching a 10% move in the markets from last December to now. The recent spike in oil points to a rise in global demand, and that international markets continue to outpace domestic growth. However, our market historically sells at 17-20 times next year’s earnings and the S&P is currently selling at 12.5. That equates to a 30% – 40% discount, and great value within domestic share prices.

We are very excited for the opportunities that lie ahead. We will, of course, inform you of any allocation changes within the Model Portfolios and provide you with our Annual Review around this time next month.

Please contact us directly if you have any questions.

Happy holidays to you and your families.

Ron Sloy, CFP

Learn more about Ron Sloy.

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