Client & Advisor Update - November 03, 2008

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October Markets A Fright Fest

Stocks bounced back last week, putting together back-to-back gains on Thursday and Friday for the first time in October. However, it was one of the worst months in Wall Street history. Standing alone, last week looks impressive, with the Dow Jones, S&P 500, and NASDAQ all soaring nearly 10 percent. Yet last week's gains are a reflection of all the selling in previous weeks.

For the month, the Dow Jones lost about 14 percent, bringing its year-to-date losses to just under 30 percent. The S&P 500 and NASDAQ both dropped nearly 17 percent for the month, with year-to-date results of -34 percent and -35 percent, respectively.

October seems to be the month when most of the stock market crashes and bottoms have occurred.

In the commodities market, crude oil prices fell over 32 percent in October, the largest percentage since NYMEX trading began in 1983, according to the U.S. Energy Information Administration. Locally, I am seeing more gas stations posting prices at $1.99 or below for regular gas. Gold and silver prices also retreated by nearly 14 percent for the month as the dollar has gained strength against the euro.

The economic news is not good and it appears almost certain that we are now in a recession. On Thursday, the U.S. Commerce Department reported that the nation's Gross Domestic Product (GDP) contracted at an annualized rate of 0.3 percent, only the fifth quarter in more than 17 years that GDP did not increase. The classic definition of a recession is when GDP shrinks for two consecutive quarters.

Another telling sign of a slowdown in economic activity is MasterCard's weekly survey of credit card transactions for gas station purchases. Last week's survey showed that motorists consumed 6.4 percent less gas compared to a year ago. The U.S. Department of Energy reports that we are driving 5.6 percent fewer miles than last year as well.

Last week the Federal Reserve cut key interest rates by a half-point to 1.0 percent, the same level as after the 9/11 terrorist attacks. Unemployment rates have risen and are expected to go higher. At least after tomorrow, much of the uncertainty surrounding the Presidential election should be over. I say “should” with hopes that there will not be a repeat of 2000's legal drama.

The best news for investors is the seasonally strong time of year is finally here. The stock market is much healthier between November and April than it is between May and October. In fact, if you invested in the S&P 500 on May 1 and sold on October 31 every year since 1950, you actually lost money in the past 28 years, according to the Investor's Almanac. On the other hand, if you invested in the S&P 500 on November 1 and sold on April 30, your money would have appreciated by over 2,200%! Wall Street has a saying (naturally) for this, "Sell in May and go away."

Some people think this seasonal anomaly exists because people start looking ahead to the next year during the holidays. Others believe that pension funding starting at the end of the year through April 15 causes these seasonal distortions. It is probably a little of both.

Most economists expect that the U.S. economy will experience three consecutive quarters of negative GDP growth, starting with the third quarter of 2008 and ending after the first quarter of 2009. Historically, the best time to buy stocks has been approximately 4 months before end of a recession, according to Ned Davis Research. If the recession we are probably in ends around March 31, 2009, the best time (again, historically speaking) to add money to the stock market could be around Thanksgiving. Or not. My Magic 8-Ball says to check again later.

As the votes are counted tomorrow night (you did/will vote, right?), keep in mind what Sir Winston Churchill said nearly 60 years ago:

"Many forms of Government have been tried, and will be tried in this world of sin and woe. No one pretends that democracy is perfect or all-wise. Indeed, it has been said that democracy is the worst form of government except all those other forms that have been tried from time to time."