Weekly Market Commentary 8-22-2011

Cold Hard Facts

Tim Phillips, CEO – Phillips & Company

Last month I mentioned we might “face some pretty gut wrenching days ahead with tremendous market volatility.” That might have been an understatement with everything that has happened.

  • Dysfunction in DC
  • Weak economic data
  • European bank problems
  • Downward revision on economic forecasts

The real question is on many investor’s minds is, now what?

If we could all retire comfortably with our cash on hand and live off of near 0% returns, then that would be fantastic. Unfortunately, individual investors, pension plans, endowments, and foundations need better returns in order to meet their future obligations. That necessity for returns is why we invest in riskier assets like stocks and bonds.

Since investing is a necessity and market timing is a parlor trick, let’s look past the Wall of Worry and look at some of the cold hard facts (charts are courtesy of the Bespoke Investment Group)

1) Companies reported better earnings and revenue last quarter. They also raised guidance going forward.

percent of companies beating earnings estimates by quarter

historical quarterly guidance rates

2) Wall Street strategists are still holding onto their return expectations according to Bloomberg. In general, I don’t hold out much faith in this cohort; however they do look at data more analytically and rationally than most.

2011 year end s&p 500 price targets

3) This year is looking a lot like last year. Both peaked at the end of April and saw a very weak summer where the S&P 500 went negative for the year. Last year that weak summer was followed by a monster rally that started just after the Jackson Hole Fed Meeting. That same meeting is set to take place this week.

s&p 500 ytd returns

Last year the Jackson Hole Meeting was on August 27th. Between August 27th and the end of the year the market rallied 18.94%.

Not to sound too wildly optimistic, there is a real chance the consumer loses confidence in this recovery and in the policy makers. Durable goods numbers come out this week which might give us a good indication. While I’m not a pessimist by any measure we could see more downside if consumption data shows significant weakness. Lastly, when markets drop this much they tend to overcorrect to the upside before building a base.

Here are some simple tips to make sure you are prepared for either situation:

  • Review statements to make sure you don't have any unknown risks.
  • Continue to reflect on your time horizon for the use of your investments. If you have time (3 to 5 years) equity markets can be reasonable places to invest.
  • Build in hedges for deflation. If a slowdown in global growth occurs, there will be a mad rush for higher fixed income returns. This is something we focused on with our clients.
  • Stop, challenge and choose your path based upon cold hard facts. Emotions are always tempting to follow unfortunately more often than not they lead to poor outcomes.

We appreciate all the feedback we get every week I look forward to your responses throughout the week

Tim Phillips, CEO – Phillips & Company



Primary research done by

Adam Gulledge, Associate – Phillips & Company