September 2011 Peak View Newsletter
from Jim Onorato
Well, the roller coaster ride continues. August was one of the most volatile months in stock market history and so far September has not been much different. Concerns over the potential default of Greece and overall European debt crisis combined with the lack of confidence in our own government has gripped the stock market with fear and panic. Day-to-day, and week-to-week and even month-to-month volatility has become a fact of life. As investors we must take a long term approach. To attempt to time the market or just say enough is enough and no longer invest doesn't make sense. What does make sense is to take a long term approach and avoid the short term gyrations.
Despite all of the "noise" that has been dominating the headlines, I have tried to remain focused on two things (1) stocks are currently very cheap by historical measures and (2) the U.S. economy is recovering and is growing. An analogy that I like to use regarding the U.S. economy is with someone that has been in a serious accident. The best doctors have been called in and have done everything they could do for the patient. Now the patient just needs time to rest and heal. Our economy was fraught with excessive borrowing and consumption that had been building over a 25 year period. Those kinds of excesses take years to work off. The U.S. economy is better than it was three years ago but still has a long way to go. U.S. corporations on the other hand have wrung out most of their excesses by drastically reducing spending and are now flush with cash. This year the earnings of companies in the Standard & Poor's 500 will surpass the record earnings set in 2007. Despite record corporate earnings in 2011, stocks are considerably cheaper than they were four years ago when the Dow was trading above 14,000. In our view this is probably the best time to own stocks in the past fifteen years. Unfortunately investors have become so discouraged after a decade of virtually no returns on stocks that they have lost faith in the stock market. When we meet with clients and remind them that stocks have averaged nearly a 10% return per year for over a century, they don't believe us.
On August 10, 1982 the Dow Jones Industrial Average closed at 780. Eighteen years later on March 3, 2000 the Dow closed at 10,367. Including dividends that is a compounded annualized return of 18%. Today (9/14/11) the DJIA closed at 11,246, eleven and a half years later. For the full twenty nine years 1982-2011 that works out to be approximately a 10% annual return. After a decade of virtually no returns stocks are once again very attractive in our view.
Occasionally one of our clients will call us during volatile periods like this and say "let's sell everything and sit in cash until the dust settles." The problem with that is that is not an investment strategy. That is trying to time the market — something we are not very good at doing. Some of the great investors that we follow including Warren Buffet and John Bogle believe that stocks will produce returns close to their long-term average over the next decade and outperform most other asset classes. We agree with their thinking.
Best Regards,
James Onorato
President
September 14, 2011