Stock Market Commentary
For the week of October 6, 2008
The Market
The week that began with the House rejecting a plan for the government to buy the bad assets weighing down banks and other financial institutions ended with the House approving a sweetened package passed by the Senate. The markets experienced dramatic drops Monday when the first bill failed, then fluctuated throughout the week waiting for Congress’ next move. The Dow ended the week down 7.30 percent to close at 10,325.38. The S&P fell 9.34 percent to finish the week at 1,099.23, and the NASDAQ lost 10.81 percent to end the week at 1,947.39.
Rebate Expiration Date – Oct. 15, 2008, is the deadline to file a 2007 tax return for those who requested an extension. It is also the deadline for filing a 2007 return to receive an economic stimulus payment.
Relief At The Pump – Despite hurricanes and stock market storms, the price of a gallon of gasoline has declined about 11 percent since reaching a record high of $4.11 on July 17. Prices are averaging about 30 percent higher than a year ago. The relief comes as crude oil prices have dropped about 25 percent from their record high of $145.29.
Buck An Hour – American employers in the private sector spend an average of 95 cents an hour to provide retirement benefits to their employees (Source: Department of Labor, BTN Research).
Three Out Of Four – Seventy-four percent of American workers who have access to an employer sponsored 401(k) plan make elective deferrals into their company’s pre-tax retirement plan (Source: Hewitt Associates, BTN Research).
Asian Pressure – The Chinese government held $376 billion of mortgage paper issued by Fannie Mae and Freddie Mac as of June 30, 2007, making it the largest holder of Fannie and Freddie paper outside the U.S. at that time. The takeover of the two companies by Uncle Sam on Sept. 7, 2008, makes our government (and ultimately the U.S. taxpayer) the guarantor of the timely payment of principal and interest on the debt (Source: BusinessWeek, BTN Research).
WEEKLY FOCUS – Perspective on Individual Portfolios
With the media focus on market upheaval, it’s important to remember the difference between individual and institutional investors. Institutions include mutual funds,
pension funds, banks and insurance companies. Many of these companies used leverage – what we call loans or debt – to purchase investments, but not the kind of investments most individual investors buy. Institutional portfolios may include more exotic securities, like Russian bonds or derivatives, which are investments repackaged into other investments in which the re packager sells shares. Mortgages are one instrument used as a basis for derivatives.
When the value of those underlying securities begins to drop – as mortgages did when home owners began to default – the companies who lent the money to
the institution so it could buy those investments want more collateral to secure that debt. The collateral is the security itself. Because the security has lost value, it takes more assets – in the form of cash or other securities – to secure the loan. The greater risk means fewer institutions are willing to lend money to other institutions. And that creates a credit crisis.
For the most part, individual investors don’t have exposure to those more exotic securities, and if they do, the exposure is a small percentage of their overall portfolio. While the overall impact of the institutional woes has individuals worried about the economy, many seem to understand that the problems plaguing investment and commercial banks don’t necessarily apply to them. According to an article in Thomson Corp.’s Daily News, individual investors have kept level heads during the crisis. Cash flows into stock mutual funds were flat in August, after dropping by over $19 billion in July.
We developed your investment plan specifically for you, and we factored in market risk, which is the potential for the overall markets to decline. We have allocated your assets across diverse classes and sectors to prevent overexposure to any one part of the market. While current conditions may require a tweak here and there to maintain that allocation, wholesale changes may not be appropriate for you. For most clients, we recommend patience. If you have questions or concerns, we are always here to listen. Please don’t hesitate to call.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Morgan Stanley Capital International Europe, Australia and Far East Index (MSCI EAFE Index) is a widely recognized benchmark of non-U.S. stock markets. It is an unmanaged index composed of a sample of companies representative of the market structure of 20 European and Pacific Basin countries and includes reinvestment of all dividends. Written by Securities America. SAI# 288292
