Worst Quarter since 2009

October 8, 2011 at 6:32 pm Leave a comment

As the title implies, the market performance this quarter was the poorest in nearly three years. Only Q4 of 2008 fared worse, and as you recall stocks hit a bottom soon thereafter in March 2009, and went on for a two year climb. There are several similarities between the situation now and back in 2008. Then, the markets were focused on the fallout from the banking crisis here in U.S. Now, it is a macro issue again, this time sovereign debt situation in Europe. On the valuation basis, stocks are now at the level of late 2008 – early 2009. An important difference is that balance sheets and company earnings are in incomparably better shape now than three years ago.

However, the markets don’t seem to pay attention to individual company performance lately. Even recent fairly positive economic reports from the U.S. – such as a solid manufacturing report, upward revision of GDP, and lower unemployment claims – have been ignored. Instead, the markets choose to focus on the possibility of Greek default. The situation in Europe is indeed uncertain and without a doubt can cause further market turmoil. In fact, most observes believe that Greece default in some form can not be avoided. Many economists also think that U.S. will enter (or already have entered) another recession and that it will have a negative effect on the currently stellar company earnings. In appears, therefore, that the market is already pricing in these outcomes.

Right now, the markets trade on fear and on uncertainty. As we gain more clarity into the macro issues, company fundamentals will once again drive company valuations. The coming earnings season will provide some insight going forward. I believe that combination of current extreme pessimism and 2008-like low valuations present an excellent buying opportunity for equity investors.

Entry filed under: Market Conditions.

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Blog Author

Leon Shirman's long-term investment philosophy is summarized in his book, “42 Rules for Sensible Investing”, also available from Amazon.


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