October 2011 Peak View Newsletter
from Jim Onorato
The third quarter of 2011 was the worst quarter for stocks since 2002. The S&P 500 declined 14% in the third quarter alone and is down about 18% from the high reached on April 29. Over the last twenty five years, the market has experienced down third quarters seven times. Four of those quarters have seen drops that have averaged 15%. During the fourth quarter that followed those seven down quarters, the average return has been 10.3%. This is not to suggest that the market has to follow this script in this year's fourth quarter but it does put this past quarter into perspective.
As we have mentioned in previous commentaries, stocks appear to be very cheap by historical measures. Rather than trading on fundamentals the market is experiencing a crisis of confidence. There seems to be a disconnect between what economists are predicting and what corporate CEO's are saying. Most CEO's that I have seen interviewed recently have said that their businesses are doing well on both the top and bottom line. Although no one can predict the future most CEO's as well as local business owners we have talked to do not foresee another recession. Although we have said this repeatedly investors need to brace themselves and take a longer view. Clearly there are problems worldwide and the eventual outcome is uncertain. I know this sounds cliché but things are never as good as they appear and things are never as bad as they appear.
I read a recent interview with Warren Buffet. All of the businesses owned by his company, Berkshire Hathaway, with the exception of those that are tied to homebuilding and construction, are doing well. I personally put more credence in what people that are actually running businesses are seeing than in the opinions of the countless strategists and economists that appear daily on CNBC. Companies will begin reporting third quarter earnings next week. If earnings are more or less in line with analysts' estimates and they are reasonably optimistic about the coming quarters the market should rally. If third quarter earnings are disappointing, (which I do not expect) I believe that stock prices have already priced in this disappointment.
Throughout history, including the last decades that most of us can remember, there have been wars, famine, and natural disasters. In addition, we have all watched or experienced relational and financial deceit from the household to the national level. There is nothing new under the sun. However, in the digital age we now live in with constant access to information it just seems that way.
In all of my years in the investment business I have never found it to be a more confusing and difficult time for investors. And right now most investors have gotten very discouraged. The stock market is trading at approximately the same level that it was in 1999 – and we are all twelve years older. Many investors have not seen any meaningful gains in their portfolios in over a decade. I began my career in 1982. Like today investors then were frustrated and discouraged as stocks had been stuck in a trading range for over a decade. The ensuing eighteen years the stock market experienced its best advance ever. Today stocks are nearly as undervalued as they were then. This is only the second time in my career when stocks have been this cheap. Unlike almost anything else we buy where we want to pay the lowest price, when stocks are cheap no one seems to want them. In 1999 when the market was trading at one of the highest valuations in history, people could not invest enough in stocks. As Warren Buffet has been quoted saying many times, "Be greedy when others are fearful and fearful when others are greedy."
Enjoy the fall season. This is my favorite time of year.
Best Regards,
James Onorato
President
October 8, 2011