Wealth Management

Market Review - Third Quarter 2009

Bears looking for a correction were sadly mistaken as the bull run continued in the third quarter. It was the markets’ best third quarter since 1998 with the Dow Jones Industrial Average climbing 15.82%. In addition, the tech-laden NASDAQ continued its advance, gaining 15.90% along with the S&P 500 jumping 15.61% for the quarter, capping seven straight monthly gains. U.S. stocks have advanced more than 50% from their lows in March but remain 30% below their October 2007 highs.

Many of the investment trends in place throughout the year remained in force this quarter. Developed and emerging markets posted stronger gains than their domestic counterparts. The MSCI Emerging Markets Index posted a 20.90% quarterly return and was the only index with positive year-over-year performance. One notable exception was China’s Shanghai Composite, which declined 5.68% this quarter but remained 67% higher on the year. Small and mid-size companies continued to outpace large and mega-cap companies. The Russell 2000 gained 19.28%, while the S&P Mid Cap 400 climbed 19.98% for the quarter. There was a decisive style change as value stocks outperformed growth stocks by 4.25%. Additionally, technology, the year’s leading market sector, took a back seat in the third quarter to gains in financials, industrials, and materials as investor sentiment shifted toward these beneficiaries of a global economic recovery.

Adding to the market’s positive sentiment was the recognition that it has been a year since the depths of the financial crisis, one that led us into the deepest economic recession since World War II, and that the world has come back from the brink of financial and economic ruin. Bulls point to the fact that the recession appears to be ending, noting that credit markets continue to normalize, every meaningful leading  economic indicator is pointing to recovery, inflation remains contained, and corporate profits are poised to snap back and even surprise on the upside. In addition, the Fed has signaled it will remain accommodative and is not likely to raise rates until the second half of 2010, creating a positive environment for stocks.

Sidelined investors have massive money market fund balances, still north of $3.5 trillion and earning less than a quarter of one percent. As a result, any sign of market weakness has been met with renewed investor interest pushing equities higher. The markets have come a long way in the last six months, and it would not surprise us to see a mild correction in the fourth quarter. It could be triggered by a disappointing third quarter earnings season or further evidence of a deteriorating job market. However, declines may be short-lived with the tremendous amount of cash on the sidelines and a reasonably valued market.

That said, Cape Cod Five will continue to focus on asset allocation and diversification as the best means to protect our clients’ portfolios and focus our security selection criteria around high quality companies with healthy balance sheets, strong cash flows and good earnings prospects.

Michael S. Kiceluk, Chief Investment Officer (mkiceluk@capecodfive.com)
Edward R. Eastman, III, Senior Investment Officer (neastman@capecodfive.com)
Rachael Aiken, CFP, Senior Investment Officer (raiken@capecodfive.com)

The facts and opinions presented herein are provided solely for the information of Cape Cod Five Trust and Asset Management clients. The information presented has been compiled from sources believed to be reliable and accurate, but we do not warrant its accuracy or completeness and will not be liable for any loss or damage caused by reliance thereon.

Investments are NOT FDIC INSURED, NOT DIF INSURED, NOT BANK GUARANTEED and MAY LOSE VALUE.