Photo:  Stan Honda / Getty Images / August 28, 2011)

Wall Street might have been miffed last week as the spotlight strayed as far west as Wyoming, where central bankers huddled to discuss monetary policy. But not so miffed that the market didn’t shake off a mild earthquake and incoming hurricane to post its first gain in five weeks.

Stocks’ 4.7% rebound came even without further monetary coddling from our benevolent Federal Reserve. In a much-anticipated speech Friday, Fed Chairman Ben Bernanke pledged to support our weakening economy but stopped short of promising yet another round of Treasury buying. This shifts the pressure to the administration to devise a longer-term solution for our structural debt problem, and by one count, the word “fiscal” appeared 15 more times in Bernanke’s speech than “monetary.” Stocks responded with a 1.5% gain on Friday to the decision to forgo a temporary monetary fix in search of a more sustainable fiscal cure.

With that, the stock market has rebounded 5.1% from its Aug. 8 low, after an 18% correction from its late-April peak. Economic data released last week were hardly inspiring: Orders for big-ticket items rose 4% in July from June, but sales of new homes fell for a fourth straight month, home prices slipped and unemployment claims increased. Yet stocks gained even as economists continued to trim their growth forecasts—a sign the market might have factored in much of the bad news. Bargain hunters were further emboldened when Apple shares (ticker: AAPL) held steady following the resignation of its visionary CEO Steve Jobs, and after Warren Buffett’s Berkshire Hathaway (BRK-A) invested $5 billion in Bank of America (BAC).

Will the Standard & Poor’s 500’s Aug. 8 low of 1119 remain the market’s low-water mark for 2011? Among the encouraging signs: While economic cues have been weak, consumer sentiment can’t seem to get much worse. Stocks have also become very cheap relative to bonds: The S&P’s dividend yield recently matched that of U.S. 10-year Treasuries, when the norm since 1981 has been for Treasuries to pay a yield 2.7 times richer, notes Ned Davis Research. On the other hand, readings among investment advisors haven’t yet reached the extreme pessimism seen at a selling climax. And assets in Rydex bull funds still amounted to 55.6% of all funds—compared to 50.5% or lower at market bottoms.

With stocks already anticipating a mild profit recession, traders will be on the lookout for signs that things are worse than expected. Yet plunging interest rates will encourage refinancing, and debt-service burdens will shrink, says Ned Davis’ consumer strategist Pat Tschosik. Retail gas prices have fallen 9% despite the summer driving season; jobs are being created (albeit slowly), and consumers’ net worth has risen in seven of the past eight quarters. But watch out for damage to the wealth effect among richer consumers should stocks or home prices fall further, or professional employment start to decline.

The Dow Jones Industrial Average had its best week in nearly two months when it ended last week up 467 points, or 4.3%, to 11,285. Nasdaq Composite Index jumped by 138, or 5.9%, to 2480, while the Russell 2000 index gained 40, or 6.2%, to 692(Source: Barrons Online).

Last week, US Stocks and Foreign Stocks increased. Bonds decreased. During the last 12 months, STOCKS outperformed BONDS.

Returns through 8-26-2011	1-week	Y-T-D	1-Year	3-Years	5-Years	10-Years
Bonds- BarCap  Aggregate Index	-.6	5.8	4.6	7.2	6.6	5.7
US Stocks-Standard & Poor’s 500	4.1	-9.5	7.2	-5.4	-5.1	-.2
Foreign Stocks- MS EAFE Developed Countries	.6	-12.2	2.4	-6.4	-4.8	1.6

  

The FED and other Central Banks have not yet followed through with coordinated efforts to support their economies and restore confidence. Meanwhile, last week’s economic reports indicate the economy has slowed more than economists expected. These reports coupled with last week’s drop in the stock market, will diminish American’s confidence even further. And, as I reported in The Weekly Commentary weekly during each of the past three weeks, a continued crisis in confidence will probably result in further economic slowdown, and maybe a full-fledged recession. I believe the probability of a recession has grown dramatically.

The stock markets have already dropped in anticipation of the economic slowdown. There is a possibility the forecasted downturn is now fully factored into stock prices. If true, this would not be the time to sell. On the other hand, the economic downturn could be long-lasting and severe. It is very difficult to predict its severity. There is no exact, 100% sure-fire way to time recessions or markets. Due to the lack of clarity in my crystal ball, I recommend the following, depending upon which category fits your unique circumstance:

1. Aggressive investors, moderately aggressive investors, and investors who do not intend to touch their investments for 10 years or longer – continue to hold the current allocation of core investments, and wait to gather more information, and carefully watch central bank activities especially from FED Chairman Bernanke later this week.

2. Investors who need to withdraw from the investment portfolio – “park” any amounts you expect to withdraw within the next 5 years in a short/intermediate term bond fund.
 
3. Conservative, moderately conservative, preservation minded investors and investors who will start withdrawing from their portfolio in 5 to 10 years– reduce exposure of the more volatile stock and stock mutual fund holdings in your portfolio.

Let me know if you have any additional questions.

“Behind me is infinite power, before me is endless possibility, around me is boundless opportunity.”

The show airs on WDIY Wednesday evenings, from 6-7 p.m. The show, hosted by Valley National’s Laurie Siebert CPA, CFP, welcomes guest, Jane Honeck, CPA, PFS and author of “The Problem With Money? It’s Not About the Money!” Jane is a money coach specializing in tax and financial planning for small businesses, individuals, and couples. Laurie and Jane will discuss:

“Money beliefs and how they affect our financial choices.”

Laurie will take your calls on this subject and other financial planning topics at 610-758-8810. WDIY is broadcast on FM 88.1 for reception in most of the Lehigh Valley; and, it is broadcast on FM 93.9 in the Easton/Phillipsburg area; and, it is broadcast on FM 93.7 in the Fogelsville/Macungie area – or listen to it online from anywhere on the internet. For more information, including how to listen to the show online, check the show’s website www.yourfinancialchoices.com and visit www.wdiy.org.

Keith Srakocic – AP

My Pittsburgh Pirates – their fall from first place in their division to 15 games behind may have set a record, if they keep track of such things. My confidence in them has been shattered. On Sunday, the Pirates lead the Cincinnati Reds 4 to 3 going into the ninth inning. Prior to the All-Star break, I would have been supremely confident they would protect the lead and win the game. Today, I had a bad feeling and just knew they would lose, which they did 5 to 4 – in the ninth inning.

Reflecting on this, it is clear that I have repeated what has happened suddenly to the average American’s view about the economy and our leadership (both the White House and Congress) in Washington. Many Americans have simply lost confidence of a positive outcome and are conserving their cash, expecting the worst.

Join Us for Celebrity Bartender Night at Apollo Grill!

I would like to ask every one of you to come out and support Valley National Financial
Advisors at the Apollo Grill on Thursday, September 15^th for our Celebrity Bartender event!  Laurie Siebert, host of “Your Financial Choices” will join me in taking over the bartending duties from 5-7 PM to support the Leukemia & Lymphoma Society.  VNFA has organized a team to participate in the 2011 “Light The Night” Walk in support of our colleague and friend, Donna Young, who has been fighting Non-Hodgkins Follicular Lymphoma since 2009.  Donna has been with Valley National Financial Advisors in 1989 and we are incredibly proud to support her and LLS with this event!

Photo: Ralph Orlowski/Getty Images

Anxiety about a European banking crisis and another batch of weak U.S. economic cues tested the resolve of bargain hunters in the U.S. market, sending stocks down for a fourth straight week.

Money fleeing Europe in search of safe—or safer—harbors drove the yield on U.S. 10-year Treasuries to depths not seen since the 1960s and briefly below 2% Thursday, while gold climbed for a seventh straight week to another record. U.S. stocks have fallen 16.5% in less than a month, and on Friday the crop of stocks plumbing fresh 52-week lows swelled to about 600—versus just a dozen braving new highs.

At this rate, the stock market is quickly becoming both an economic predictor and a self-fulfilling prophecy. The correction shows traders ratcheting up the odds of a U.S. recession, but stocks’ tense selloff—and the anxious headlines it creates—further scare consumers and corporations into reining in spending. Recent data showed industrial production and retail sales stabilizing in July, but these took the economy’s pulse before the willies set in. More recently, the Philadelphia Federal Reserve reported a sharp drop in business activity as August began, with its index falling from 3.2 in July to a negative 30.7 and toward levels typically seen before or during recessions.

The good news: Investors’ expectations are rapidly decimated, and marked-down stocks are trading at just 13 times companies’ projected profits. But the bad news is how logic can be overwhelmed in a market swept up in emotion, and Wall Street’s profit projections can still come down. Dell (ticker: DELL) shares slipped 10% midweek after it lowered its revenue target amid weak government and corporate spending, while Hewlett-Packard’s (HPQ) market value shrank by a fifth, or about $12 billion, after it cut its profit forecast and detailed plans to leave the computer business.

What can stop this negative feedback loop? Forceful policy support ranks high on bulls’ wish list, with our Fed chairman scheduled to speak this Friday—exactly a year after he rescued the market with a second round of quantitative easing, or QE2. Talk about a happy anniversary: Some 60% of global money managers surveyed by BofA Merrill Lynch are now counting on QE3 should the Standard & Poor’s 500 fall below 1100. That’s up from just 28% a month ago.

Ben Bernanke will need help from his stingier European counterpart. Alas, the European Central Bank tightened credit in the summer of 2008, and again this year, even as its weaker economies struggled. Last week, data showed Germany’s economy slowing sharply, and European stocks fell 6.1% for their fourth straight weekly loss. In the last “stress test” of 90 European banks, the median coverage ratio—the amount of loss provisions set aside against defaulted assets—was about 38%, compared with 66% among U.S. banks earlier this year, notes Joseph Kalish, Ned Davis Research’s senior macro strategist. CLSA strategist Christopher Wood thinks economic growth in Europe could deteriorate more than in the U.S. as a result of “recent monetary tightening, relative currency strength and dramatic fiscal tightening in much of the periphery.” A pause in Europe and the U.S. won’t spare China’s export-driven economy, which has been growing at nearly a 10% clip (Source: Barrons Online).

Last week, US Stocks and Foreign Stocks decreased. Bonds increased. During the last 12 months, BONDS outperformed STOCKS.

Returns through 8-19-2011	1-week	Y-T-D	1-Year	3-Years	5-Years	10-Years
Bonds- BarCap  Aggregate Index	.4	6.4	5.5	7.6	6.8	5.8
US Stocks-Standard & Poor’s 500	-4.6	-13.1	.4	-6.6	-6.0	-.5
Foreign Stocks- MS EAFE Developed Countries	-3.5	-12.8	-1.0	-6.5	-5.1	1.6

Source: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized excluding dividends.

 For emphasis, let me repeat last week’s headline statement:

“Do not let emotions overwhelm your sense of reason- avoid panic. The market is encountering a crisis in confidence. This is not the same as a financial crisis or a recession, although, a prolonged crisis of confidence can lead to either if the crisis in confidence lasts long enough. The FED realizes this. The FED has stated several times in the past they will take measures to support the economy. I believe, more probably than not, that the FED will move to support the economy and its actions will be well coordinated with other central banks around the world. This action could be impressive and the stock market’s WOW factor may be big enough to ignite a substantial rebound in stock prices. I am confident you would not want to sell now and miss the rebound if and when the FED acts.”

With the passing of one week, we now know:

1. The FED has indeed taken measures to support the economy by signaling that it would hold short term interest rates at exceptionally low levels through mid-2013.

2. Other central banks around the world acted to support their economies and protect their markets.

Although we cannot assume any guarantees from the actions so far, we can be more optimistic that the key players are attempting to restore confidence. And, we know from history, that when confidence is restored, the equity markets can go up as fast as they went down.

Let me know if you have any additional questions.