Hello Everyone,

RE:  Crazy Markets -- What to Do?

Three quarters of the year is behind us.  Attached is my “What If’s” Chart for September 30, 2007.  So far the ride has been bumpy and returns have been reasonable, to above average.  Volatility has awakened and it can be expected to continue to prowl markets worldwide, frightening the weak and providing opportunities for those who have confidence in the future. 

Many are wondering what they should do.  The wall of worry which the stock market is said to climb is clearly in tact.  Many think we have gained as much as we will this year.  “The actual returns of the S&P 500 over the last 50 years (i.e., 50 separate 1-year returns produced from 1957-2006) has fallen outside of a range defined as ‘plus or minus 10%’ from the index’s average annual return 62% of the time” (source: “By the Numbers” referencing BTN Research). 

Values in the equity markets remain strong in spite of year-to-date gains.  Historically, the end of the year has generated above average gains.  The returns for this decade are significantly below the long term averages (see the “What If’s” Chart).  Low interest rates and lower taxes on investment earnings are strong positives for the U.S. market. 

Bernanke has shown the flexibility to act decisively.  Markets have reacted.  Strong earnings growth since 2001 has not yet been fully reflected in equity prices.  The memory of the 2000 Bear Market will take years to fade from the memory of investors.  This will keep prices from overshooting values for years.

On August 16^th intraday declines from the July highs were 11.79% on the Dow and 11.75% for the S&P 500.  This reminds me of the intense volatility of August 1982 that marked the beginning of great the Bull Market of the 1980’s.  I expect technicians to adjust their rules a bit in order to view August 16^th as the long awaited 10% correction which will allow new highs to be achieved without their warning about the need for a 10% correction.

In short: summer is over; the Fed has acted; the re-pricing of risk in the credit markets is a manageable problem; we are approaching the strongest months for equities.  Higher short-term volatility of returns is the price of the higher returns for equities.  History has repeatedly confirmed that optimism is the winning strategy.

Regards,  Jim

James O. Davis, Founder
The Financial Advisory Group
A Registered Investment Advisory Firm
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Email: jdavis@moneyjungle.com

The preceding market commentary contains opinions of the author.  Statistics cited were obtained from sources believed to be reliable.  Past performance is no guarantee of future results.  Investments involve risks including possible loss of principal.