3rd Quarter 2011
October 1. 2011

The third quarter of 2011 felt like a repeat of the 3rd quarter of 2010. The market sold off 18 percent from the high it reached in April of this year, very similar to last year’s 16 percent drop in the market. What has made this so surprising is S&P 500 companies just reported record earnings during the quarter along with dramatically strengthening their balance sheets. It does not make the drop in stock prices any easier to stomach but let’s take a historical perspective on these numbers. The U.S. Stock Market on average, since 1980, has dropped 14 percent during a typical year, and about every fourth year will drop by more than 20 percent (a Bear market). If we go back 30 years to October 1981 (many of you remember how strong the U.S. economy was back then!), the S&P 500 was at 121. At the close of the third quarter the S&P 500 was 1124, up almost tenfold.

Unfortunately, we do not have any better feel for short term market moves than anyone else does. What we need to recognize is that short-term volatility does not matter to us as Investors. It actually creates opportunities for our portfolio managers to buy companies they believe have been unfairly sold-off with the markets. If we try and get out of the markets to miss these drops, we will inevitably miss much of the recovery as well. Chuck Royce of The Royce Funds stated this week, “first and foremost we have to be patient but in challenging times like these it’s even more important to stick to our core investment principles”. Remember the greatest risk we face in our financial lifetimes is inflation, that 3-4 percent that we lose each year in purchasing power.

It’s easy to lose sight of the forest through the trees. So, we would like to take a minute and discuss what really drives stock prices over an extended period of time. It is not all of the noise and distractions we hear on TV or read in the Wall Street Journal. The real driver is the basic core value of humans striving for a better life. America has been unique in that we expect our children and grandchildren to have a better life than we have had. It is no longer just the developed nations that want these things; it is spreading all around the globe. Parents in India and China are spending everything they make so their children can get and education in expectation of better life. And in the Middle East, people are fighting for more opportunities and freedoms. These changes will only create more opportunities for innovative corporations and entrepreneurs. This is a big part of why we are seeing this move to Globalization. In periods of uncertainty like this we can panic like so many others and invest in 10 year US treasuries paying 1.8% or we can stay invested in leading Multinational Corporations. We have a very strong conviction that staying fully invested is the right thing to do.

So, what are we doing here during these “difficult” times to enhance your portfolio? We continue our communication with mutual fund managers to receive their input and expectations. Internally, we meet monthly to review, evaluate, and compare mutual fund manager’s opinions and performance. And quarterly we review your ratio of stock to bonds to determine if we need to modify any of your positions. Unless something changes with your situation we will make sure your overall allocation matches your Investment Policy Statement we have on file. And the final step is meeting and communicating with you to make sure things have not changed.

Please welcome Yvonne Allen as our new office manager and a valuable addition to our team. She handles the accounting, human resources and keeps our office operating effectively and efficiently. Yvonne comes from the real estate industry and is a graduate of Texas A&M University.

Daniel P. Michalk, CFP®, ChFC