MARKET SENTIMENT - 2010/08/15

HALVORSON RESEARCH ASSOCIATES, LLC.

Market sentiment has been surprisingly bullish for most of last few weeks in spite of consistent talk of a double-dip in the economy’s recession. Evidence of such a prolonged recession is aided by the lack of new jobs and higher unemployment rates. However, corporate earnings are increasing at a 30-35% gain, year over year. This week saw Mr. Bernancke repeat his statement that this is a very slowly developing economy and that it could use some additional stimulus, preferably one that would come from private rather public funding.

Can investors count on earnings alone to support current levels of prices?

Probably not since the public usually remembers the darkest side of new developments, not the brightest.

Can the S&P Index help us understand the market?

Maybe. Let’s take a look and theorize on where we are. We find that the market has been relatively stable this year in spite of the cool economy. The index dropped from 1115.10 on 12/31/09 to 1073.87 on 1/31/10, a 3.8% drop. It then climbed to 1211.67 on 4/15/10, a gain of 11.3%. Next it dropped to 1030.71 on 6/30/10, a dip of 14.9%. After a lot of zig-zagging, now the S&P 500 Index stands at 1079.25, a gain of 4.7%, for the month, but losing 3.2% for the year to date.

How the year to date figures shown here will compare to actual 12/31/10 numbers remains to be seen, but 4.5 months provides enough time for much mischief, including re-elections for each member of the House of Representatives. The results of this election could very well include a new direction for the country, especially with respect to spending and funding of government programs. If no new direction is achieved, then taxes will have to be extended and increased, which would cause immediate negative reaction to the U.S. stock markets.

WHAT DOES THIS MEAN FOR HRA?

Because of the possibility that no new direction is achieved, investors should be aware of the risk of a sharp and prolonged sell-off. HRA’s view is that the composition of the new House will be more conservative than the present House, and even if only a portion of the conservative agenda is considered do-able, the risk of a broad sell-off is diminished.

HRA interprets the stock market changes during 2010 as being slightly positive, with no lasting effects on the long range view. A consensus of investment commentators seems to be forming which says that, although there may be short term pain, investors should look forward to better results. Included in this view, is the recognition that investors need to have a better understanding of financial and economic matters.

HRA now recommends 80 to 90% of investable assets be invested in long term growth stocks. This reduction of 10% reflects the view that the pain of transition might be higher than anticipated six months ago.

HRA notes that not all investments are suitable for all investors: consult your investment advisor before making any major changes to your investments, and don’t forget to update your goals and risk tolerance as things change in your life and in the overall markets.
 

Good Luck, and Happy Investing!

Halvorson Research Associates, LLC

Janet Raphael, CFA                      Bill Halvorson, FSA                Erik Hughes        

239-738-4212    e-mail: JCR@HRAstockpicks.com