|Market Returns||As of 9/30/2011|
|Index Name||Market Segment||Year to Date Returns||5 Year Annualized Returns|
|S&P 500||U.S. Large Cap||-8.68%||-1.18%|
|Russell 2000||U.S. Small Cap||-17.02%||-1.02%|
|MSCI Emerging||Emerging Mkts||-23.53%||2.50%|
|BarCap Aggregate Bond||Core Bond||6.65%||6.53%|
|Data courtesy of Morningstar|
|Fundamental Analysis||As of 9/30/2011|
|Index Name||Market Segment||Current PE Ratio||Avg. Historic PE Ratio|
|S&P 500||U.S. Large Cap||19.45||16.41|
|Index Name||Market Segment||Current Yield||Avg. Historic Yield|
|10 Year US Treasury Yield||U.S. Treasury Bonds||1.92%||4.67%|
|Data courtesy of Robert Shiller, Yale Department of Economics (http://www.multpl.com/)|
|Technical Analysis||As of 9/30/2011|
|Index Name||Market Segment||Long-Term Trend (1-2 Years)||Intermediate-Term Trend (6 months to a year)|
|S&P 500||U.S. Large Cap||UP||DOWN|
|Russell 2000||U.S. Small Cap||SIDEWAYS||DOWN|
|MSCI Emerging||Emerging Mkts||SIDEWAYS||DOWN|
|BarCap Aggregate Bond||Core Bond||UP||UP|
|Market Sentiment||As of 9/30/2011|
|Description||Price Compared to 3 Year Avg.||Current Trend||Meaning|
|Volatility Index (fear gauge)||High||UP||Extreme Fear (Bullish)|
|Long-Term Treasuries||High||UP||Move to Safety (Bearish)|
|Dollar||Average||UP||Move to Safety (Bearish)|
Key points for each section:
Year to date returns are down nearly 10% for U.S. large companies. Small cap U.S. stocks and international stocks are down anywhere from 14% – 24% for the year. The third quarter was the worst quarter for the stock market since the last major bear market of 2008-2009. Bonds (especially treasuries) did well in a move to safety.
The current price to earnings ratio for the S&P 500 is high compared to historical PE ratios leaving more room on the down side for valuations and prices to drop, but during the last quarter valuations improved. U.S. Treasury yields are at historic low levels.
Stock markets declined significantly in the third quarter pushing equities into an oversold range. This will likely result in a short term bounce as most of the bad news has already been factored into the recent drop. Bond markets are mixed; safe havens have sky rocketed, while higher yield bonds have fallen with the stock market.
While money flooded into safe-haven assets like the dollar and treasuries last quarter the Volatility Index (which measures fear) went into an extreme level of fear, which from a contrarian standpoint is bullish.
What does it all mean?
Going into the third quarter we were very defensive, and although some of our portfolios lost money in the 3rd quarter, we held up significantly better then the market as a whole. The current extreme level of fear and irrational selling present an opportunity to capture a potential market bounce into the Christmas season. Although we intend to stay somewhat defensive, we do believe a relief rally will occur in the 4th quarter and have rebalanced and positioned the accounts to take advantage of this scenario.