Permanent Value

Weekly Update: September 7- 10, 2010

Michael La Salle
September 10th, 2010

Short Week Good for Stocks

Stocks had a good week this week despite being shortened by the Labor Day holiday.  The S&P 500 gained 4.22% as the Dow Jones Industrial Average gained 3.07% for the week.

In economic news, the trade gap narrowed in July due to a rebound in exports and a fall in imports.  The overall U.S. trade deficit shrank to $42.8 billion from $49.8 billion in June.  Economists’ estimates were set at a deficit of $46.8 billion.  Rounding out the slow week, initial jobless claims fell substantially last week.  The 451,000 new claims came in much lower than the expected 470,000 claims for the week.

In earnings news, an extremely slow week was highlighted by Pep Boys missing expectations as the company posted earnings of 18 cents per share, 5.26% below estimates.

What opportunities are ahead?

Over the past three years we have seen some extreme ups and downs in the stock market.  Beginning in October 2007, the S&P 500 dropped about 55% through March 2009, followed by a recovery of over 65% through April 2010.  With all of the volatility over this time period many investors have continued to search for investments that can minimize the ups and downs while still being able to have a positive return on investment.

During this volatile time period, a tremendous amount of money has been moved to money market or CDs.  Money markets yield about one-tenth of a percent, and one-year CDs yield a little over one percent.  With an average annual inflation rate of about two and a quarter percent of the last three years, investors are actually losing purchasing power by putting their money in money market accounts and CDs.

One area of the market that will protect you from drastic swings in the stock market, but will also earn you a solid return, is investment-grade corporate bonds.  An investment-grade bond is has a credit rating of “BBB” or better by Standard and Poor’s.  These higher credit ratings signify a company’s capability to pay debt and therefore are a lower risk.

The main risk associated with all bonds is a rising rate environment.  With interest rates at extreme lows, the Federal Reserve will inevitably have to begin raising rates, and to combat inflation.  Since the Fed has stated that they will not be raising rates for “an extended period,” bonds should remain a strong investment for the foreseeable future.

With many investment-grade bonds yielding more than five percent, investors can earn returns that are nearly double the rate of inflation while keeping their exposure to volatility down.

Market Returns

This Week Year to Date Last Year Last 5 Years
S&P 500 4.22% -0.50% 6.26% -10.63
Dow Jones Industrial Average 3.07% 0.33% 8.68% -2.02%

Next Week’s Economic Releases

September 14 – Retail Sales

September 15 – Industrial Production

September 16 – Producer Price Index, Jobless Claims

September 17 – Consumer Price Index, Consumer Sentiment