Economic and Investment News Bits
  • The markets had a tough time last week, with the S&P 500 closing Friday at 1,906, down 5% from its peak last month. It makes the following observation from Dudack Research very timely. “The S&P 500 has advanced 57% in 27.6 months since the June 2012 low and has not had an intervening 10% correction, almost twice as long as the typical duration.  One might think such a correction, which would drop the S&P below its 200-day moving average of 1,903, would be an ominous event.  But a decline to 1,810, a 10% correction, would simply represent a test of a three-year uptrend line and be a normal pullback within a longer-term bull cycle.”
  • Our readers know that we at PDS have been anticipating a market correction for more than a year. While the S&P 500 is the bellwether index for this topic, other indexes and sectors have already been in correction mode. Natural resources, precious metals, and domestic small company stocks have struggled for much of the year.  As Warren Buffet said recently, “These are normal events, and true long-term investors must be willing to accept them in exchange for better returns than cash.”
  • In minutes from their September meeting, the Fed cited “concerns that a strengthening dollar on weakness elsewhere could slow Fed efforts to reach the 2% inflation goal.” Rhino Trading Partners notes this is about as dovish a comment about low interest rates as we could expect. It means low interest rates for perhaps another year. “The stock market loves easy money.”
  • Ned Davis Research expects a market rally in the fourth quarter and early 2015. “The bigger risk may be too much of a rally, pushing sentiment to excessive optimism.”
  • “With a nervous stock market, all eyes are on corporate earnings The third-quarter pre-announcement ratio is running above its long-term average, suggesting market gains during reporting season,” (Source: Federated Investors).
  • An oil price war? “The timing would be good from the standpoint of the world economy, and it would fit, if the U.S. and Saudis are in league to break Russia’s economy,” (Source: Strategas Research).
Thought for the week

“No successful investor has ridden long-term global growth by being a pessimist.”

Monty Guild, American economist (b.1942)

Wealth Idea for the Week

We have been advocates of dividend-paying stocks for some time, recognizing that, even in times of market turmoil, the dividends just keep coming in.  We believe investors should find the kind of real income they desire by employing dividend stocks, combined with corporate bonds (and municipal bonds where appropriate) and dynamic/go anywhere funds.  If interest rates do indeed stay low for some time, it means continued meager CD and short-term bond yields.  There is some growing consensus that global growth and inflation will stay relatively low, interest rates will remain low, and the economic expansion will stay slower and longer than previously thought.

 Graph of the Week


The above chart from Strategas and Charles Schwab tells us that it is not unusual for the market to have a sizeable correction in the years when there is a mid-term congressional election.  But perhaps even more telling is the knowledge that in the 12-months following these corrections, the market has been very bullish. For example, the market had an intra-year loss of 9% in 1994, but rallied with a gain of 15% the following 12 months.  The long-term averages have been corrections of 19%, followed by gains of 32%.


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