3rd Quarter Client Note

The S & P 500 index was down 13.90 % during the quarter, the worst quarter since the financial panic of 2008. The S & P 500 (US large cap stocks) was actually among the better performers of risky asset classes. Small caps were down 22% and international stocks fell 19.6%. On the other hand, dividend paying stocks held up better, with the DJ Select Dividend Index losing 8.05%.

The selling reflected continuing concerns over European bank solvency on account of exposure to Greece and whether the economy will drift back into a recession. Much of the selling was of course triggered by the acrimonious debate in Congress over raising the debt ceiling and the subsequent downgrade of US Treasury bonds by Standard and Poor’s. Bonds with significant credit exposure lost 5-10% for the quarter, while US Treasuries, despite the August downgrade, actually increased in value in a typical flight to quality.

We can expect continued volatility as the daily (if not momentary) news cycle prompts hair-trigger traders to constantly reevaluate their positions. In the meantime, fundamental, long-term investors become attracted to stocks as their prices decline to more reasonable valuations.

At the risk of sounding like a broken MP3 file, the best advice is to stay out of this tug-of-war but to settle into an asset allocation with sufficient exposure to the risky asset classes to afford a reasonable chance of achieving your goals, while at the same time allowing you to sleep at night.

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