Third Quarter Review – Climbing a Wall of Worry

The Federal Reserve has given the market four clear buying signals dating back to November, 2008 and we know these as Quantitative Easing 1 (QE1), QE2, Operation Twist, and the newest QE3 announced in the third quarter of 2012. The new and improved QE has the Federal Reserve buying an additional $40 billion per month of Agency mortgage-backed securities and they signaled low short-term interest rates into 2015. The stock market has responded to each Fed move with higher equity prices.

The S&P 500 gained 6.35 percent for the quarter and lifted its year to date return to an attractive 16.44 percent. Even international stocks as measured by the MSCI EAFE Index were up by 6.92 percent in the quarter, but they still lag the S&P 500 with a 10.08 percent return since January 1. The individual strength of Apple Computer carried the NASDAQ Index to a quarterly return of 6.50 percent and a 20.65 percent YTD return.

Despite historically low interest rates, the fixed income asset class remains steady. The Barclays U.S Aggregate Bond Index gained 1.58 percent for the quarter and is up 3.99 percent so far this year. For the quarter and the year-to-date period, the credit sectors are outperforming the Treasury sectors as credit spreads continue to tighten while interest raise remained basically unchanged. Strength in the equity market translated into strength in the high yield sector. As the bond market’s top performer, high yield returned 4.53 percent for the quarter and 12.13 percent for the year to date period.

As we enter the fourth quarter investors are staring at a huge wall of worry. The market concerns are endless as investors fret over the: European debt crisis, U.S. debt burdens, looming fiscal cliff, housing woes, high unemployment rates, slower GDP growth, political uncertainties, and the presidential election. With all the looming global uncertainty it is easy to take a low or no risk approach to the markets and your financial plan. With so many investors fearful of the environment now is likely the best time to invest at the appropriate risk level of your long-term plan. One investment saying recommends, “Don’t fight the Fed”. The Federal Reserve right now is participating in the financial markets in a big way and it will likely be more profitable to join them versus fighting them.

At Gradient Investments, we believe your best long-term solution is to stay invested for the long-term at highest risk level your situation can tolerate. At the end of the day, your wealth will be determined by your time in the market, not by your efforts to time the markets.

Posted on October 8, 2012
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