November Monthly Market Commentary

THE MONTH IN BRIEF
An astonishing rally during the last three days of November did much to improve what had been an anxious month for investors. The Dow ended up gaining 0.76% in November after jumping 4.24% on November 30 alone, responding largely to coordinated action by the world’s central banks to improve liquidity in the European Union. We got hints that the real estate market might be finding a legitimate bottom, some fine numbers from Black Friday and Cyber Monday, and pleasant surprises from some other key economic indicators. Our stock market struggled to pull off gains in the face of debt worries, both in Europe and at home. ¹

DOMESTIC ECONOMIC HEALTH
November 2011 might be remembered most for a political and economic lowlight. On November 21, the Congressional “super committee” of 12 assigned to come up with a plan to reduce the federal deficit simply quit. This paved the way for involuntary cuts of $1.2 trillion in 2013. That prompted a stock market plunge and a Fitch Ratings decision, with the agency changing its U.S. outlook to “negative”.^2,3

In better news, consumers spent $52.4 billion during the four-day Thanksgiving Day weekend. The National Retail Federation said average shopper shelled out $398.62 in those four days, a new record. Cyber Monday sales rose 22% over 2010 levels to $1.25 billion. The Commerce Department noted that personal spending rose only 0.1% in October; however, personal wages did increase by 0.4%. The federal government’s Consumer Price Index also budged north by 0.1% in October with annualized inflation coming in at 3.5%.^4,5,6 .ng only rose 0.1% for the montday sales rose 33%m some other key economic indicators. Statesidgn

There was a rebound in consumer confidence. November’s Conference Board poll saw a 15-point spike to 56.0. The month’s final University of Michigan index of consumer sentiment came in at 64.1, much better than the final 55.7 for October; it was the third straight monthly gain for the index.^4,7

Now, over to industry. The Institute for Supply Management’s November manufacturing PMI bucked a global trend and advanced 1.9% to 52.7, marking the sector’s 28th straight month of expansion. ISM’s most recent service sector PMI (October) came in at 52.9, down from 53.0 the preceding month. Producer prices fell 0.3% in October and total durable goods orders slipped 0.7% in September (they went +0.7% when transportation orders were factored out).^8,9,10,11

The jobless rate stunningly dropped to 8.6% in November; it had been 9.0% in October and 9.1% in September. Some of this reduction in unemployment was attributable to people dropping out of the job hunt, but the private sector did add 140,000 positions last month. The underemployment rate fell 0.6% to 15.6%.¹²

GLOBAL ECONOMIC HEALTH
Political change did not stop key Italian bond yields from approaching 7% during November. On November 23, 35% of the 10-year notes offered at Germany’s federal bond auction went unsold. After these alarming developments, the Federal Reserve and other key central banks united on November 30 to foster cheaper dollar loans for European lenders, a move that global markets cheered in relief.^1,13,14,15

Economically, the world is sometimes a small village. Was the trouble in Europe now indirectly affecting China? Its PMI fell to 48 in October from 51, the largest monthly slip since March 2009; below 50 is the contraction zone. Output also contracted in Taiwan and South Korea in October. Key PMIs for the Eurozone and Great Britain also fell below 50 in that month of data.^14,16

WORLD MARKETS
Most world benchmarks seem headed for double-digit 2011 losses; fortunately, our benchmarks have done better. How did things go globally in November? Poorly, for the most part. In USD terms, here are the monthly numbers according to Morningstar on November 30: FTSE 100, -0.70%; DAX, -0.85%; CAC 40, -2.72%; All Ordinaries, -4.03%; Shanghai Composite, -5.46%; Nikkei 225, -6.16%; TSX Composite, -6.29%; Hang Seng, -9.63%; Sensex, -10.09%. The oft-watched MSCI World (-2.69%) and MSCI Emerging Markets (-6.75%) indices both slipped for the month.^17,18

COMMODITIES MARKETS
Gold futures advanced 1.45% last month while copper lost 1.56% and silver lost 4.51%. Through the end of November, gold was +23.14% YTD on the COMEX. The U.S. Dollar Index gained 2.86% in November; at 78.49, it was still -1.01% YTD. Oil ended November at $100.36 a barrel after going +7.69% for the month. Natural gas went -9.76% in November. Retail gas prices (regular unleaded) fell 4.30% last month to $3.30 a gallon at month’s end. Coffee gained 2.82% for November, but other key crop futures descended: cotton lost 11.13%, corn lost 6.03% and wheat lost 2.27%.¹⁵

REAL ESTATE
Unexpectedly, the National Association of Realtors found that existing home sales increased 1.4% in October. Inventory shrank 2.2% to an 8.0-month backlog; the median sale price was $162,500, down 4.7% from a year before. The NAR also measured pending home sales surging by 10.4% in October. The S&P/Case-Shiller Home Price Index showed an overall 0.6% decline in September; after a 3Q overall gain of 0.1%, the index showed home prices at roughly 1Q 2003 levels. New home sales increased by 1.3% in October with the annualized gain at 8.9%.^15,19,20,21

Interest rates on conventional mortgages didn’t move much. Freddie Mac noted the following change (or lack thereof) in its November 3 and December 1 Primary Mortgage Market Surveys: the average rate on the 30-year FRM stayed flat at 4.00%, and the average rate on the 15-year FRM ticked down 0.01% to 3.30%. Rates on 5/1-year ARMs moved down from 2.96% to 2.90%; rates on 1-year ARMs fell to 2.78% from 2.88%.²²

LOOKING BACK…LOOKING FORWARD
The month ended well. November 28-30 represented the S&P 500’s best three days since November 23-25, 2008. At the close on November 30, the Dow was back above 12,000, the S&P back above 1,200 and the NASDAQ back above 2,600.¹⁵

December is historically a fine month for stocks, of course. With the continuing EU debt troubles, will a “Santa Claus” rally will occur as we get toward New Year’s Day? It does seem as though there is more optimism at the moment, or at least greater distraction on Wall Street from the crisis in Europe and the apparent slowdown in China. Perhaps stateside indicators will encourage the bulls to run and make 2011 a bit better statistically for investors. As CNBC notes, the Dow has gone positive in 71% of Decembers in its long history, posting an average gain of 1.40%. December has also been the best month of the year for the S&P 500 since 1950.^29,30

UPCOMING ECONOMIC RELEASES: Here are the news items arriving between now and the end of the year: the November ISM service sector index and the report on October factory orders (12/5), the initial University of Michigan December consumer sentiment survey (12/9), the report on November retail sales and a Federal Reserve policy announcement (12/13), the November PPI and November industrial output (12/15), the November CPI (12/16), data on November housing starts and building permits (12/20), November existing home sales (12/21), the BEA’s final estimate of 3Q GDP, the final University of Michigan December consumer sentiment survey and the Conference Board’s November Leading Economic Indicators index (12/22), November consumer spending, new home sales and durable goods orders (12/23), the October Case-Shiller home price index and the Conference Board’s December consumer confidence poll (12/27), and the November pending home sales report (12/29). The December unemployment report will be out on January 6.

MONTHLY QUOTE
“If you command wisely, you’ll be obeyed cheerfully.”

 – Thomas Fuller

To Your Prosperity,

Kevin Kroskey

Citations

1 - www.reuters.com/article/2011/11/30/markets-stocks-close-idUSWEN125420111130 [11/30/11]
2 - abcnews.go.com/Business/gdp-grew-25-percent-boosted-consumer-spending-double/story?id=14821833 [10/27/11]
3 - abcnews.go.com/blogs/business/2011/11/fitch-cuts-u-s-outlook-from-stable-to-negative/ [11/28/11]
4 - www.kansascity.com/2011/11/29/3291899/americans-in-november-more-confident.html [11/29/11]
5 - www.reuters.com/article/2011/11/23/us-usa-economy-consumer-idUSTRE7AM17320111123 [11/23/11]
6 - www.businessweek.com/ap/financialnews/D9R1SFE00.htm [11/16/11]
7 - latimesblogs.latimes.com/money_co/2011/11/report-consumer-confidence-is-up-.html [11/23/11]
8 - www.ism.ws/ISMReport/MfgROB.cfm [12/1/11]
9 - www.ism.ws/ISMReport/NonMfgROB.cfm?navItemNumber=12943 [11/3/11]
10 - www.bls.gov/news.release/ppi.nr0.htm [11/15/11]
11 - community.nasdaq.com/News/2011-11/us-durablegoods-order-fell-07-in-october.aspx?storyid=104419 [11/23/11]
12 - www.reuters.com/article/2011/12/02/us-usa-economy-idUSTRE7AL14I20111202 [12/2/11]
13 - www.reuters.com/article/2011/11/29/italy-bonds-auction-idUSL5E7MS3S820111129 [11/29/11]
14 - www.fxstreet.com/fundamental/analysis-reports/the-energy-report/2011/11/24/ [11/24/11]            
15 - money.msn.com/market-news/post.aspx?post=fd688bc8-f250-4f5f-b360-b0324cd7581c [11/30/11]
16 - www.ft.com/cms/s/0/88f51a98-1c3e-11e1-af09-00144feabdc0.html#axzz1fKupP0aW [12/1/11]
17 - news.morningstar.com/index/indexreturn.html [11/30/11]
18 - mscibarra.com/products/indices/international_equity_indices/gimi/stdindex/performance.html [11/30/11]
19 - realtors.org/press_room/news_releases/2011/11/ehs_oct [11/21/11]
20 - www.census.gov/const/newressales.pdf [11/28/11]
21 - www.marketwatch.com/story/us-home-prices-drop-06-in-september-2011-11-29 [11/29/11]
22 - www.freddiemac.com/pmms/ [12/2/11]
23 - money.cnn.com/data/markets/dow/ [11/30/11]
24 - money.cnn.com/data/markets/sandp/ [11/30/11]
25 - money.cnn.com/data/markets/nasdaq/ [11/30/11]
26 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=11%2F30%2F01&x=0&y=0 [12/2/11]
27 - www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [11/2/11]
28 - www.treasurydirect.gov/instit/annceresult/press/preanre/2001/ofm71101.pdf [7/11/01]
29 - montoyaregistry.com/Financial-Market.aspx?financial-market=an-introduction-to-the-stock-market&category=29 [11/2/11]
30 - www.cnbc.com/id/45481657 [11/30/11]
This news release was prepared by Peter Montoya.

October Monthly Market Commentary

THE MONTH IN BRIEF
In October 2011, stocks had their best month in nearly 20 years. The S&P 500 climbed 10.77% as optimism returned; investors were relieved that Eurozone nations were progressing toward a solution to avert a Greek default. However, the month ended with a political curveball that threatened to sabotage the whole effort. At home, consumer confidence and mortgage rates were at generational lows while consumer spending, auto sales and new home sales held up. Occupy Wall Street gained the world’s attention, as the hazily defined movement may have inspired its first tangible financial change.¹

DOMESTIC ECONOMIC HEALTH
In the month of October, the most reassuring stateside economic indicator was a quarterly one. The initial estimate of 3Q GDP was a 2.5% rise: precisely what economists were forecasting and exactly what was needed to at least temporarily silence arguments that we were on the cusp of a double-dip recession.²

Consumers had become pessimists, but they were still spending enough money to move the economy along. They weren’t happy: the month’s final University of Michigan consumer sentiment survey came in at 60.9, better than the preceding month’s 59.4 but still very low. The Conference Board’s October poll fell to an abysmal 39.8. Yet personal spending had improved by 0.6% in September, even as incomes only rose 0.1% in that month.^3,4

At both the mall and the factory, there were still signs of vitality. The latest purchasing manager indexes from the Institute for Supply Management showed mild sector expansion: 50.8 in October for the manufacturing index, 53.0 in September for the service sector index. Retail sales zoomed north 1.1% in September, according to the Commerce Department. U.S. auto sales posted a 7.5% monthly gain in October. Overall durable goods orders retreated 0.8% in September, yet there was a 1.7% gain in hard good orders ex-transportation.^5,6,7,8,9

Moderate inflation was also alive and well; the federal government’s Consumer Price Index showed annualized inflation reaching 3.9% in September; annualized core CPI was unchanged from the August reading of 2.0%. The CPI posted a 0.3% monthly gain for September while the Producer Price Index went up 0.8% after a flat August.¹⁰

The jobless rate didn’t move for the third straight month; in September, it remained at 9.1%. On Capitol Hill, President Obama’s American Jobs Act stalled in the Senate and there were indications that the “super committee” of 12 legislators assigned to craft a deficit reduction plan wasn’t making much progress. President Obama used an executive order to speed up implementation of rules intended to ease the debt burden from college loans, and another to broaden the qualifying criteria for HARP, the federal government’s underutilized mortgage relief program. The Occupy Wall Street protest spread to other cities; while some of the protesters seemed naïve and poorly informed about the relationship of Main Street to Wall Street, they may have hit one of their targets. Late last month, Bank of America announced it was dropping its proposed $5 monthly fee on debit card use; other lenders considering debit card usage fees publicly reconsidered them.^11,12

GLOBAL ECONOMIC HEALTH
Things were looking so much better in Europe, until one politician made a truly scary announcement on Halloween. Greek prime minister George Paparandou stunned the European Union with his intent to make the latest austerity cuts for Greece contingent on a public vote. On November 2, German Chancellor Angela Merkel and French President Nicolas Sarkozy gave Paparandou an ultimatum: no more money from the EU or the IMF unless Greek voters approve the cuts. One day later, Paparandou scuttled the referendum and faces a potentially grim political future. In late October, key bankers and insurers within the Eurozone agreed to a 50% writedown on their Greek debt holdings; additionally, European finance ministers unveiled a plan to boost bank capital ratios to 9% or better by June and increase the size of the Eurozone bailout fund fourfold.^13,14,15,35

So what was going on in Asian economies? Some inflation readings were lower than analysts expected: 4.4% for Indonesia; 4.2% for Thailand; 3.9% for South Korea. India’s PMI improved 1.6% in October to 52.0 and its exports surged 36% in the month. On the downside, Taiwan’s latest GDP reading was lower than anticipated, and so was China’s official PMI, which approached a three-year low last month.¹⁶

WORLD MARKETS
Looking at Morningstar’s figures for global indexes (calculated in USD terms), we see some impressive one-month rebounds from September. England’s FTSE 100 went +8.11% and the French CAC 40 +8.75%, but that paled in comparison to the German DAX at +11.62% and Hong Kong’s Hang Seng at +12.50%. Other nice performances: India’s Sensex, +7.60%; Australia’s All Ordinaries, +7.13%; the TSX Composite of Canada, +5.40%; the Shanghai Composite of China, +4.62%; Japan’s Nikkei 225, +3.31%. The MSCI World Index rose 10.26% last month while the MSCI Emerging Market Index gained 13.08%.^17,18

COMMODITIES MARKETS
Metals rebounded in October, as follows: gold, +6.3%; silver, +14.2%; copper, +15.0%; platinum, +5.5%; palladium, +6.0%. Gold ended up +21.3% YTD when October concluded. Oil rose $13.99 on the month, settling at $93.19 a barrel on Halloween. The real yield of the 10-year note (already down to 0.17% on September 30) diminished to 0.08% by October 31. The U.S. Dollar Index retreated 3.03% last month.^{19,20,21,22,23}

REAL ESTATE
There was some good news: the Census Bureau reported housing starts up by a whopping 15.0% for September, and it said new home sales improved by 5.7% in that month. The August edition of the S&P/Case-Shiller Home Price Index posted an overall advance for the third month in a row (0.2%), with prices rising in 10 of 20 metro areas and the year-over-year price decline shrinking to just 3.8%.^24,25,26

On the downside, the National Association of Realtors said existing home sales fell 3.0% for September, leaving sales on pace for a 2012 total of 4.91 million; this was be precisely the same amount of residential resales as 2010, that year being the worst on record for the category since 1997. NAR also said that pending home sales slipped 4.6% in September (economists polled by Bloomberg had forecast a 0.4% gain). ^27,28

Mortgage rates went up in October. Freddie Mac’s October 27 Primary Mortgage Market Survey showed the average rate on the 30-year FRM at 4.10%, up from the bedrock-low 4.01% on September 29. Other average interest rates moved as follows during that interval: 5/1-year ARMs, from 3.02% to 3.08%; 1-year ARMs, from 2.83% to 2.90%; 15-year FRMs, from 3.28% to 3.38%.²⁹

LOOKING BACK…LOOKING FORWARD
This sterling market month started and ended with sour notes: the Dow’s worst trading days of October were October 1 and Halloween. Those notes aside, October was positively amazing for the blue chips. In percentage terms, the DJIA had its finest month since October 2002 (and that was with a 2.26% fall on Halloween). All 30 components advanced; the last month in which that happened was September 2010. Also worth noting: the NASDAQ had its best month since September 2010. Here was the tale of the tape at the end of October. ¹

This is the time of year many investors look forward to; November often marks the start of the traditional fall-winter “sweet spot” for the market. According to the Stock Trader’s Almanac, the S&P 500 has advanced in 57% of Novembers since 1928, with an average gain of 0.78%. Not only that, November has been the second-best month of the year for the S&P 500 since 1950. However, the yet-unresolved situation in Europe is hanging over the market like a cloud; Europe is the market mover now and for the near future. The current Greek government may or may not survive a seemingly inevitable confidence vote; Greek PM George Papandreou’s recent backtrack on a bailout referendum only adds to the uncertainty. So November proceeds with a caution flag for investors; in the best-case scenario, EU pressure on the Papandreou government and a calming of internal Greek political strife lowers that flag.^{34, 35}

UPCOMING ECONOMIC RELEASES
The rest of November offers the following news items: the October ISM service sector index (11/3), the October unemployment report (11/4), September’s wholesale inventories (11/9), the initial University of Michigan November consumer sentiment survey (11/11), the October PPI, October retail sales and September business inventories (11/15), October’s CPI and industrial output (11/16), October housing starts and building permits (11/17), the Conference Board’s October Leading Economic Indicators index (11/18), October existing home sales (11/21), the latest FOMC minutes and the BEA’s second estimate of 3Q growth (11/22), the October consumer spending and durable goods orders reports and the final University of Michigan October consumer sentiment survey (11/23), October new home sales (11/28), the September Case-Shiller home price index and the Conference Board’s November consumer confidence snapshot (11/29), and finally the October pending home sales report and a new Beige Book from the Federal Reserve (11/30).


MONTHLY QUOTE
“The family you come from isn’t as important as the family you’re going to have.”

 – Ring Lardner

To Your Prosperity,

Kevin Kroskey

Citations. 1 - blogs.wsj.com/marketbeat/2011/10/31/data-points-u-s-markets-60/ [10/31/11] 2 - abcnews.go.com/Business/gdp-grew-25-percent-boosted-consumer-spending-double/story?id=14821833 [10/27/11] 3 – www.foxbusiness.com/markets/2011/10/28/consumer-spending-rises-weak-incomes-worry/ [10/28/11] 4 - www.npr.org/blogs/thetwo-way/2011/10/25/141683694/consumer-confidence-back-down-to-recession-level [10/25/11] 5 - www.ism.ws/ISMReport/MfgROB.cfm [11/1/11] 6 – www.ism.ws/ISMReport/NonMfgROB.cfm [10/5/11] 7 - www.latimes.com/business/la-fi-economy-retail-20111014,0,1716584.story?track=rss [10/14/11] 8 - online.wsj.com/article/SB10001424052970204528204577011691060440660.html [11/1/11] 9 - www.forbes.com/2011/10/26/durable-goods-order-rise-extransportation-mortgage-apps-rise-marketnewsvideo.html [10/26/11] 10 - www.nytimes.com/2011/10/20/business/economy/us-consumer-inflation-subdued-housing-starts-up.html [10/19/11] 11 – www.marketwatch.com/story/september-data-show-improvement-in-jobs-market-2011-10-07 [10/7/11] 12 - bottomline.msnbc.msn.com/_news/2011/11/01/8583136-after-debit-card-battle-beware-of-more-bank-fees [11/1/11] 13 - www.reuters.com/article/2011/10/31/us-greece-referendum-analysts-idUSTRE79U7GO20111031 [10/31/11] 14 - www.marketwatch.com/story/greek-bondholders-to-take-50-haircut-2011-10-26 [10/27/11]             15 - www.guardian.co.uk/world/2011/nov/02/greece-ultimatum-austerity-forego-eu?intcmp=239 [11/2/11] 17 - news.morningstar.com/index/indexreturn.html [11/1/11] 18 - mscibarra.com/products/indices/international_equity_indices/gimi/stdindex/performance.html [10/31/11] 19 - www.bullionpricestoday.com/bullion-prices-rally-in-october-2011/ [10/31/11] 20 - www.marketwatch.com/gold-futures-drop-as-us-dollar-surges-2011-10-31 [10/31/11] 21 - online.wsj.com/mdc/public/npage/2_3051.html?mod=mdc_curr_dtabnk&symb=DXY [11/2/11] 22 - blogs.wsj.com/marketbeat/2011/10/31/data-points-energy-metals-528/ [10/31/11] 23 – www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldYear&year=2011 [11/1/11] 24 – www.thestreet.com/story/11283665/1/raise-the-roof-housing-starts-up-15-in-september.html [10/20/11] 25 - marketwatch.com/story/new-us-home-sales-rise-as-prices-tumble-2011-10-26 [10/26/11] 26 - articles.latimes.com/2011/oct/25/business/la-fi-home-prices-20111026 [10/25/11] 27 - ajc.com/business/sales-of-previously-occupied-1206303.html [10/20/11] 28 - bloomberg.com/news/2011-10-27/pending-sales-of-u-s-existing-homes-unexpectedly-falls-4-6-on-demand-ebb.html [10/27/11] 29 - freddiemac.com/pmms/ [11/2/11] 30 - montoyaregistry.com/Financial-Market.aspx?financial-market=an-introduction-to-the-stock-market&category=29 [11/2/11] 31 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=11%2F1%2F10&x=0&y=0 [11/2/11] 31 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=11%2F1F2%2F10&x=10&y=18 [11/2/11] 31 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=11%2F1%2F10&x=0&y=0 [11/2/11] 31 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=10%2F31%2F01&x=0&y=0 [11/2/11] 31 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=10%2F31%2F01&x=0&y=0 [11/2/11] 31 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=10%2F31%2F01&x=0&y=0 [11/2/11] 32 - www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [11/2/11] 33 - www.treasurydirect.gov/instit/annceresult/press/preanre/2001/ofm71101.pdf [7/11/01] 34 - www.cnbc.com/id/45082000 [11/2/11]

  35 - www.nytimes.com/2011/11/04/world/europe/greek-leaders-split-on-euro-referendum.html [11/3/11]

September Monthly Market Commentary

THE MONTH IN BRIEF
September 2011 was a difficult time for many investors; the best thing about it may be that it’s over. Stocks and commodities were battered during the month - the S&P 500 retreated 7.18% and the Thomson Reuters/Jefferies CRB Commodity Index sank 12.97%. Investor anxiety about the European Union’s debt problems increased, and Wall Street was unimpressed by some of the stateside economic statistics. Would stocks struggle for the balance of the year? Had we entered a new recession? Investors could only hope for market performance and economic signals in future months that would put both questions to rest.^1,2

DOMESTIC ECONOMIC HEALTH
Consumer spending increased by 0.2% in August, down from a revised 0.7% gain in July. Consumer incomes declined by 0.1% in August for the first time in almost two years. Consumer confidence – which seemingly had nowhere to go but up in light of the July figures – did improve somewhat. The University of Michigan’s final September survey rose to 59.4 from the final August 55.7 reading, 1.6 points better than the consensus forecast of economists polled by Bloomberg News; the survey’s index of current conditions went up to 74.9 from August’s final 68.7 mark. The Conference Board’s consumer confidence index edged north 0.2% to 44.7. Consumer prices grew 0.4% in August, with core CPI up 0.2% and 2.0% year-over-year, the biggest annualized core inflation number in almost three years. Producer prices were flat in August, and so were U.S. retail sales. The jobless rate was 9.1% in August – the 25th time in the past 27 months it had been above 9%.^3,4,5

The manufacturing and service sectors saw improved growth, at least by the gauge of the most recent Institute for Supply Management manufacturing and service sector indices. ISM’s service sector index rose to 53.3 in August from July’s 52.7 mark – an improvement few analysts were expecting. Its September manufacturing index rose a full percentage point to 51.6. Durable goods orders diminished in August, but not by much – just 0.1% overall. Core capital goods orders were up 1.1% and core capital goods shipments were up 2.8%.^6,7,8

In Washington, there were two big news items. President Obama unveiled the American Jobs Act – a bill that would cut the payroll tax for workers and businesses to 3.1% in 2012, offer tax credits as large as $4,000 to companies hiring the long-term unemployed, and devote about $80 billion into infrastructure projects. To pay for it, the President proposed $1.6 trillion in tax increases for upper-income Americans and corporations as a component of a $4.4 trillion reduction of the federal deficit by fiscal year 2021. Republicans dismissed any direct link between taxes on the wealthy and future job creation, and it remains to be seen if the AJA will pass in anything like its entirety.^9,10

GLOBAL ECONOMIC HEALTH
Fears of sovereign contagion grew on rumors that Greece would soon default on its debt. At mid-month, European finance ministers and central bank governors (and even Treasury Secretary Timothy Geithner) conferred to try and figure out the least disruptive resolution to the crisis. The G-20 issued a statement promising a “strong and coordinated international response to address the renewed challenges facing the global economy”. That aside, both the Federal Reserve Open Market Committee and International Monetary Fund managing director Christine LaGarde saw appreciable “downside risks” for the U.S. and world economies.¹¹

When investors weren’t worried about Greek banks going belly-up or Greece ditching the euro for the drachma, they had concerns about China. Its central bank was trying to arrange a soft landing for its slowing economy. Data showed China’s consumer prices up 6.2% in August from a year earlier; the People’s Bank of China has raised interest rates five times in the last 12 months. China’s official PMI improved a bit to 51.2 in September, but looking long-term, 59% of analysts and traders recently surveyed in Bloomberg’s Global Poll of Investors think that its economy will see growth of less than 5% by 2016. Meanwhile, key PMIs in Australia (42.3) and India (50.4) went lower.^12,13 

WORLD MARKETS
Losses abounded. Data from Morningstar tells the tale, with all of this measured in U.S. dollar terms. India’s Sensex lost but 1.34% last month. The Nikkei 225 only lost 2.85%; Germany’s DAX retreated 4.89% and England’s FTSE 100 lost 4.93%. Now the greater descents: All Ordinaries, -6.86%; CAC 40, -8.44%; Hang Seng, -14.33%; TSX Composite, -8.97%; Shanghai Composite, -8.11%. After September, all of these indices were in the red by 10% or more YTD. The biggest loser among them? The DAX, -23.99% YTD. The MSCI World and Emerging Market indices respectively lost 8.85% and 14.78% in September.^14,15

COMMODITIES MARKETS
The U.S. Dollar Index rose 6.0% in September. That alone might tell you what kind of month it was. Gold lost 11.38% last month. Other precious metals also saw major selloffs last month – platinum, -17.9%; palladium, 22.3%; silver, 28.0%. Oil futures slipped 10.82% in September. At month’s end, the price of COMEX gold was $1620.40 per ounce; NYMEX crude settled at $79.20 a barrel. The 19-commodity Thomson Reuters-Jefferies CRB Index posted a 12.97% loss on the month, and just three crops in the 24-commodity Standard & Poor’s GSCI Total Return Index of raw materials advanced – live cattle (+7.6%), feeder cattle (+7.7%) and lean hogs (+5.9%). The real yield of the 10-year note was but 0.17% on September 30, hardly changed from the 0.18% yield on August 31.^{2,16,17,18,19,20}

REAL ESTATE
The housing market appeared healthier than a year ago. Perhaps that isn’t saying much, but the progress was tangible. Existing home sales improved 7.7% in August, putting them + 18.6% from a year earlier. There were 3.2% more housing starts in August, and that indicator registered 7.8% annual improvement. August data also showed 12-month gains in new home sales (6.1%) and pending home sales (7.7%). The S&P/Case-Shiller Home Price Index rose again in July (0.9%); the index was still 4.1% below July 2010 levels.^{21,22,23,24,25}

How low could mortgage rates go? In September, the short answer was “even lower”. Homeowners who could manage a refi were looking at a 3.28% average rate for the 15-year fixed on September 29 according to Freddie Mac’s Primary Mortgage Market Survey. That was down from 3.39% on September 1. The average rate on the 30-year FRM was a milestone 4.01% on September 29; it had been 4.22% on September 1. In the same interval, the average rates on the 5/1-year ARM actually rose to 3.02% from 2.96%; rates on the 1-year ARM went from 2.89% to 2.83%.²⁶ 

LOOKING BACK…LOOKING FORWARD
Appetite for risk truly waned in September, a month in which the dollar seemingly beat every asset class.

Uncertainty defines the market at this point. Could this next earnings season be powerful enough to send stocks north in October? Could anything divert enough attention from the risks in Europe? (Don’t forget the pressure from a stronger dollar.) This is a market given to rapid sentiment shifts, and its present level of volatility might be with us for months. If it is any encouragement, October has been a decent month for Wall Street since 2000; in fact, it has been the DJIA’s fifth-best month of the year since then with an average monthly performance of +1.16%.³¹ 

UPCOMING ECONOMIC RELEASES: Here’s what we have for the rest of October: the August ISM service sector PMI (10/5), the September jobs report and a report on August wholesale inventories (10/7), the initial University of Michigan October consumer sentiment survey, September retail sales figures and August business inventories (10/14), September industrial output (10/17), the September PPI (10/18), the September CPI, a new Fed Beige Book and data on September housing starts and building permits (10/19), September’s existing home sales and the Conference Board’s September Leading Economic Indicators index (10/20), the August Case-Shiller home price index and the Conference Board’s October consumer confidence poll (10/25), September new home sales and durable goods orders (10/26), the initial BEA estimate of 3Q GDP and September’s pending home sales (10/27), and then September consumer spending and the final University of Michigan October consumer sentiment survey (10/28). 

MONTHLY QUOTE 
“It takes a long time to grow an old friend.”

 – John Leonard 

To Your Prosperity,

Kevin Kroskey

Citations.

1 - cnbc.com/id/44729786 [9/30/11]

2 - bloomberg.com/apps/quote?ticker=CRY:IND [9/30/11]

3 - businessweek.com/news/2011-09-30/consumer-sentiment-in-u-s-increases-more-than-forecast.html [9/30/11]

4 - businessweek.com/ap/financialnews/D9PP5NB00.htm [9/15/11]

5 - nytimes.com/2011/09/15/business/economy/retail-sales-and-producer-prices-unchanged-in-august.html [9/14/11]

6 - bloomberg.com/news/2011-09-06/u-s-ism-services-index-increased-in-august.html [9/6/11]

7 - ism.ws/ISMReport/MfgROB.cfm [10/3/11]

8 - marketwatch.com/story/us-durable-goods-orders-drop-01-in-august-2011-09-28?reflink=MW_news_stmp [9/28/11]

9 - money.msn.com/business-news/article.aspx?feed=AP&date=20110909&id=14243169 [9/9/11]
10 - usatoday.com/news/washington/story/2011-09-19/Obama-deficit-reduction-plan/50470916/1 [9/19/11]
11 - sfgate.com/cgi-bin/article.cgi?f=/g/a/2011/09/22/bloomberg_articlesLRXZ2L0D9L35.DTL [9/22/11]

12 - businessweek.com/news/2011-10-03/asian-economies-weaken-as-european-crisis-crushes-confidence.html [10/3/11]

13 -.businessweek.com/news/2011-10-03/china-s-expansion-in-services-may-ease-slowdown-concerns.html [10/3/11]

14 - news.morningstar.com/index/indexreturn.html [9/30/11]

15 - mscibarra.com/products/indices/international_equity_indices/gimi/stdindex/performance.html [9/30/11]

16 - blogs.wsj.com/marketbeat/2011/09/30/data-points-energy-metals-525/ [9/30/11]

17 - bullionpricestoday.com/bullion-prices-mixed-in-third-quarter-2011/ [9/30/11]

18 - online.wsj.com/mdc/public/npage/2_3051.html?mod=mdc_curr_dtabnk&symb=DXY [10/3/11]

19 - bloomberg.com/news/2011-10-02/dollar-beating-all-assets-in-september-undermines-s-p-downgrade.html [10/2/11]

20 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldYear&year=2011 [10/3/11]

21 - realtor.org/press_room/news_releases/2011/09/ehs_aug [9/21/11]

22 - census.gov/const/newresconst.pdf/ [9/20/11]

23 - census.gov/const/newressales.pdf [9/26/11]

24 - realtor.org/press_room/news_releases/2011/09/phs_august [9/29/11]

25 - articles.latimes.com/2011/sep/28/business/la-fi-home-prices-20110928 [9/28/11]

26 - freddiemac.com/pmms/ [10/3/11]

27 - montoyaregistry.com/Financial-Market.aspx?financial-market=an-introduction-to-the-stock-market&category=29 [10/3/11]

28 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=9%2F30%2F10&x=0&y=0 [9/30/11]

28 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=9%2F30F2%2F10&x=10&y=18 [9/30/11]

28 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=9%2F30%2F10&x=0&y=0 [9/30/11]

28 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=10%2F1%2F01&x=0&y=0 [9/30/11]

28 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=10%2F1%2F01&x=0&y=0 [9/30/11]

28 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=10%2F1%2F01&x=0&y=0 [9/30/11]

29 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [10/5/11]

30 - treasurydirect.gov/instit/annceresult/press/preanre/2001/ofm71101.pdf [7/11/01]

31 - cnbc.com/id/44758022 [10/3/11]

This article prepared by Peter Montoya.

August Monthly Market Commentary

THE MONTH IN BRIEF
In August, Wall Street waited for a debt deal, reeled from Standard & Poor’s downgrade of the U.S. credit rating, contended with mounting anxieties over mediocre domestic indicators and troubles in Europe, felt an earthquake and braced itself against an oncoming hurricane. No wonder the S&P 500 slipped 5.68% during the month – a month that most investors would rather forget.¹

DOMESTIC ECONOMIC HEALTH
Congress finally passed a bill lifting the nation’s debt ceiling, meeting the August 2 deadline set by the Treasury Department. However, Standard and Poor’s dropped the hammer on August 5, cutting America’s credit rating from AAA to AA+. Moody’s and Fitch Ratings did not follow suit.²

Consumer confidence really plummeted: the University of Michigan’s final August poll presented a 55.7 mark, way down from 63.7 to end July. The Conference Board’s consumer confidence index dived nearly 15 points last month, coming in at 44.5. Unemployment stayed at 9.1% in August, and for the first time since September 2010, the economy added no new jobs.^3,4,5

There was some good news: consumers were still spending, and not just on the basics. The Commerce Department said that consumer spending soared 0.8% in July, and 0.5% in inflation-adjusted terms (the best such advance in 20 months). Overall retail sales were up 0.5%, with August increases in clothing store sales (0.5%), electronics and appliance sales (1.4%), online retail purchases (0.9%), auto and auto parts sales (0.4%) and furniture sales (0.5%). In another encouraging sign, durable goods orders soared by 4.0% in June; economists polled by Bloomberg News had forecast a 2.0% gain.^6,7,8

The Consumer Price Index rose 0.5% in July with core CPI up 0.2%. The Federal Reserve’s PCE gauge rose 0.4%; the Labor Department’s Producer Price Index rose 0.2%, with core PPI rising 0.4%.^9,10

As for the Institute for Supply Management’s key manufacturing and service sector indices … the August manufacturing index looked shaky, descending to 50.6 (indicating just a small expansion) … and in early August, the July service sector PMI came in at 52.7. Yet the Commerce Department said that factory orders rose 2.4% in July thanks to both a boost in aircraft orders and the biggest one-month demand for autos in eight years.^11,12,13

GLOBAL ECONOMIC HEALTH
At mid-month, German chancellor Angela Merkel and French president Nicolas Sarkozy appeared together to reaffirm the European Union’s support for the euro and to announce three new responses to the EU debt crisis: a new EU economic forum/leadership panel that would meet every six months, a tax on financial transactions, and (shades of the Tea Party) a proposal for all EU countries to adopt constitutional balanced budget amendments. To Wall Street, this was little better than rhetoric. There was no decision to bolster the €440 billion euro stability fund or to create a “Eurobond”, a move that many analysts feel could help to stabilize bond yields across the EU’s 17 nations and aid its most indebted countries.^14,15

In the Asia-Pacific region, factories seemed to be slowing down their pace of production. The much-watched official PMI of China did show some growth, rising 0.2% to return to the 50.9 level it had been at in June. Purchasing manufacturers indexes in Taiwan and South Korea flashed contraction. Consumer price indexes in Thailand and South Korea also climbed more than analysts had forecast, with inflation in South Korea surpassing the government’s target for the eighth month in a row. Industrial output fell far short of forecasts in Japan – economists had expected a 1.5% improvement in August, but there was only a 0.6% gain. On the bright side, analysts surveyed by Reuters felt that Japan’s economy would expand by 1.2% in 3Q 2011, outpacing all other major industrialized economies.^16,17

WORLD MARKETS
While Wall Street had a trying month, other benchmarks had it worse, as these Morningstar numbers for August indicate: Canada’s TSX Composite, -2.40%; Australia’s All Ordinaries, -2.90%; China’s Shanghai Composite, -4.97%; England’s FTSE 100, -7.23%; India’s Sensex, -8.36%; Japan’s Nikkei 225, -8.93%; Hong Kong’s Hang Seng, -9.16%. The truly severe losses came in Europe: France’s CAC 40 plunged 11.29% on the month and Germany’s DAX dove 19.19%. Some of the YTD numbers were also pretty remarkable on August 31: the Sensex and DAX were respectively - 18.69% and -20.08% YTD.¹⁸

The Dow was just about the only major stock index that was not in the red at the end of August. The MSCI World Index and MSCI Emerging Markets Index also took big hits during the month, respectively sinking 7.26% and 9.19%.¹⁹

COMMODITIES MARKETS
The flight to gold was dramatic in August. Gold futures gained $200.20 (12.3%) last month. The precious metal wrapped up August at $1,828.50 an ounce and +28.67% YTD. How did other metals do? Silver went +4.1% for August, platinum +4.0%, palladium -4.5% and copper -6.3%. Oil slid 7.2% in August, with futures settling at $88.81 per barrel on the NYMEX on August 31. The 19-commodity Reuters-Jefferies CRB Index posted a 0.33% loss on the month and the U.S. Dollar Index realized a 0.30% gain. The real yield of the 10-year note was just 0.18% on August 31 (and it was briefly negative earlier in the month).^{20,21,22,23,24}

REAL ESTATE
New home sales (-0.7%) and existing home sales (-3.5%) declined in July, along with housing starts (-1.5%) and building permits (-3.2%). Pending home sales diminished by 1.3% in July, according to the National Association of Realtors. One relative bright spot: June’s S&P/Case-Shiller Home Price Index revealed a 3.6% quarterly gain in home sale prices, although the YOY price retreat deepened to 5.9%.^6,25,26

Comparing Freddie Mac’s July 28 and September 1 Primary Mortgage Market Surveys, we see that mortgages became even cheaper last month. The average rate on the 30-year FRM fell 0.33% in this period to 4.22%, and rates on 15-year FRMs fell 0.27% to 3.39%. The average rate on the 5/1-year ARM shrank 0.29% to go to 2.96% and the average rate on the 1-year ARM went 0.06% lower to 2.89%.²⁷

LOOKING BACK…LOOKING FORWARD
August 2011 was the poorest August since 2001 for America’s three major stock indices. All three had their worst month since May.¹ 

After a wild and vexing August, we are now in September - traditionally a lousy month for stocks. Of course, Wall Street has not exactly behaved according to tradition these past few years. On the hopeful side, the latest consumer spending data indicates that America’s economic engine has not stalled – and the August unemployment figures were affected by the fact that 45,000 Verizon workers went on strike (i.e., were technically jobless) during the week in which the Labor Department compiled its data. Factor in the recent demand for durable goods, the nice numbers on discretionary spending and the descent in oil prices and the economy may be in better shape than the bears presume. Perhaps we will also see a better September for stocks than analysts expect.⁵

UPCOMING ECONOMIC RELEASES: Looking at the balance of September, here is what is on tap: the August ISM service sector PMI (9/5), the Federal Reserve’s newest Beige Book (9/7), a look at July wholesale inventories (9/9), the August PPI, August retail sales figures, and July business inventories (9/14), the August CPI and August industrial output (9/15), the initial University of Michigan September consumer sentiment survey (9/16), a much-anticipated Federal Reserve meeting (9/19-9/20), August housing starts and building permits (9/20), August existing home sales (9/21), the Conference Board’s August LEI index (9/22), August new home sales (9/26), the July Case-Shiller home price index and the Conference Board’s September consumer confidence poll (9/27), August durable goods orders (9/28), August pending home sales plus the final estimate of 2Q GDP (9/29), and August consumer spending and the final University of Michigan September consumer sentiment survey (9/30).

MONTHLY QUOTE
“If you want to go somewhere, it is best to find someone who has already been there.”
 – Robert Kiyosaki

To Your Prosperity,

Kevin Kroskey

Citations.

1 - cnbc.com/id/44340676 [8/31/11]
2 - ncsha.org/blog/sp-downgrades-rating-us-long-term-debt-housing-feels-domino-effect#comment-form [8/11/11]        
3 - businessweek.com/news/2011-08-26/u-s-michigan-consumer-sentiment-index-slumped-in-august.html [8/25/11]
4 - freep.com/article/20110831/BUSINESS07/108310413/Consumer-confidence-plummets-shoppers-keep-spending [8/31/11]
5 - latimes.com/business/la-fiw-jobs-20110903,0,2844276.story [9/2/11]
6 - online.wsj.com/article/SB10001424053111904332804576538164016048034.html [8/30/11]
7 - zacks.com/stock/news/58936/Reports+of+the+Consumer%27s+Death+Are+Greatly+Exaggerated [8/12/11]
8 - bloomberg.com/news/2011-08-24/orders-for-durable-goods-in-u-s-increase-4-twice-as-much-as-estimated.html [8/24/11]
9 - forbes.com/sites/afontevecchia/2011/08/18/cpi-jumps-stoking-fears-of-stagflation/ [8/18/11]        
10 - blogs.wsj.com/economics/2011/08/17/vital-signs-producer-price-index/ [8/17/11]
11 - ism.ws/ISMReport/MfgROB.cfm?navItemNumber=12942 [9/1/11]
12 - ism.ws/ISMReport/NonMfgROB.cfm?navItemNumber=12943 [8/3/11]
13 - businessweek.com/ap/financialnews/D9PF4EQ01.htm [8/31/11]
14 - money.cnn.com/2011/08/19/news/international/european_union_debt_crisis/index.htm [8/19/11]            
15 - reuters.com/article/2011/08/16/eurozone-francogerman-idUSLDE77F12B20110816 [8/16/11]        
16 - reuters.com/article/2011/09/01/global-economy-idUSL4E7K10CA20110901 [9/1/11]         
17 - reuters.com/article/2011/08/31/japan-economy-output-idUSL4E7JV00V20110831 [8/31/11]
18 - news.morningstar.com/index/indexreturn.html [8/31/11]
19 - mscibarra.com/products/indices/international_equity_indices/gimi/stdindex/performance.html [8/31/11]
20 - blogs.wsj.com/marketbeat/2011/08/31/data-points-energy-metals-517/ [8/31/11]
21 - marketwatch.com/story/gold-steady-after-retaking-1800-2011-08-31 [8/31/11] 
22 - bloomberg.com/apps/quote?ticker=CRY:IND [8/31/11]
23 - online.wsj.com/mdc/public/npage/2_3051.html?mod=mdc_curr_dtabnk&symb=DXY [9/2/11]
24 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldYear&year=2011 [9/2/11]
25 - blogs.wsj.com/developments/2011/08/23/behind-the-numbers-perilous-time-in-home-building/ [8/23/11]
26 - dailyfinance.com/2011/09/01/5-reasons-why-your-home-will-be-worth-less-in-3-years/ [9/1/11]
27 - freddiemac.com/pmms/ [9/2/11]
28 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=8%2F31%2F01&x=0&y=0 [8/31/11]
29 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [8/31/11]
30 - treasurydirect.gov/instit/annceresult/press/preanre/2001/ofm71101.pdf [7/11/01]
31 - montoyaregistry.com/Financial-Market.aspx?financial-market=is-your-ira-slipping-away&category=1 [5/2/11]

The above commentary was produced by PeterMontoya.com.

Living With Volatility

Market volatility is here to stay--at least a while. Academic research labels times such as these in the markets as having 'volatility clustering.' This means that quick and severe bursts of volatility are exhibited. It's important to remember that there is both downside volatility as well as upside volatility.


The academic research clearly shows that periods of downside volatility are followed by periods of upside volatility. This can also be described by a phenomenon called 'reversion to the mean.' Essentially, this means that while markets are very noisy and can be quite volatile in the short run, prices do get back to some level of normalcy. This begets a very elusive question of timing: 'When will markets return to normal?'


Relatively speaking, stocks still look cheap next to bonds and cash. As the dust settles from these big market drops, markets will weigh their collective direction. On the one hand, you have rampant anxiety; on the other hand, you have attractive valuations. Patience will prove to be a virtue as the saga plays out and we eventually return to market fundamentals. 


Unfortunately you cannot predict these volatile movements with any reliability. While this immutable fact is unsatisfying to many, ignoring it most often causes the unsatisfied (and unsophisticated) investor to make emotional decisions and miss the upside of the volatility and the reversion to the mean. Leaving investment decisions to emotions and pure chance is simply not a sound philosophy.


For more information, below is a good article from Jim Parker of Dimensional Fund Advisors that puts the current market volatility in perspective. It's a good, quick read.


Hang in there.


Kevin Kroskey, CFP, MBA


----


"Living With Volatility"
Jim Parker, VP, Dimensional Fund Advisors


The current renewed volatility in financial markets is reviving unwelcome feelings among many investors—feelings of anxiety, fear, and a sense of powerlessness. These are completely natural responses. Acting on those emotions, though, can end up doing us more harm than good.


At base, the increase in market volatility is an expression of uncertainty. The sovereign debt strains in the US and Europe, together with renewed worries over financial institutions and fears of another recession, are leading market participants to apply a higher discount to risky assets.


So, developed world equities, oil and industrial commodities, emerging markets, and commodity-related currencies like the Australian dollar are weakening as risk aversion drives investors to the perceived safe havens of government bonds, gold, and Swiss francs.


It is all reminiscent of the events of 2008, when the collapse of Lehman Brothers and the sub-prime mortgage crisis triggered a global market correction. This time, however, the focus of concern has turned from private-sector to public-sector balance sheets.


As to what happens next, no one knows for sure. That is the nature of risk. But there are a few points individual investors can keep in mind to make living with this volatility more bearable.

• Remember that markets are unpredictable and do not always react the way the experts predict they will. The recent downgrade by Standard & Poor's of the US government's credit rating, following protracted and painful negotiations on extending its debt ceiling, actually led to a strengthening in Treasury bonds.
• Quitting the equity market at a time like this is like running away from a sale. While prices have been discounted to reflect higher risk, that's another way of saying expected returns are higher. And while the media headlines proclaim that "investors are dumping stocks," remember someone is buying them. Those people are often the long-term investors.
• Market recoveries can come just as quickly and just as violently as the prior correction. For instance, in March 2009—when market sentiment was last this bad—the S&P 500 turned and put in seven consecutive months of gains totaling almost 80 percent. This is not to predict that a similarly vertically shaped recovery is in the cards this time, but it is a reminder of the dangers for long-term investors of turning paper losses into real ones and paying for the risk without waiting around for the recovery.
• Never forget the power of diversification. While equity markets have had a rocky time in 2011, fixed income markets have flourished—making the overall losses to balanced fund investors a little more bearable. Diversification spreads risk and can lessen the bumps in the road.
• Markets and economies are different things. The world economy is forever changing, and new forces are replacing old ones. As the IMF noted recently, while advanced economies seek to repair public and financial balance sheets, emerging market economies are thriving.¹ A globally diversified portfolio takes account of these shifts.
• Nothing lasts forever. Just as smart investors temper their enthusiasm in booms, they keep a reserve of optimism during busts. And just as loading up on risk when prices are high can leave you exposed to a correction, dumping risk altogether when prices are low means you can miss the turn when it comes. As always in life, moderation is a good policy.

The market volatility is worrisome, no doubt. The feelings being generated are completely understandable. But through discipline, diversification, and understanding how markets work, the ride can be made bearable. At some point, value will re-emerge, risk appetites will re-awaken, and for those who acknowledged their emotions without acting on them, relief will replace anxiety.