Third quarter good for stocks, and most other investments
Stock markets worldwide roared back in the third quarter, recovering from deep spring losses as the feared “double-dip” recession remained a no-show.
The Dow Jones industrial average slipped 47.23 points to 10,788.05 on Thursday but was up 10.4% for the three months, the blue-chip index’s best quarter since the third period of 2009. The Dow is now up 3.4% since Jan. 1.
Equities also surged overseas, and U.S. investors’ returns in many foreign markets beat the Dow, thanks to a slide in the dollar’s value against other currencies.
Overall, it was far harder to lose money in financial markets than to make it in the quarter: Broad indexes of stocks, bonds and commodities all posted positive returns. Most also are now in the black for the year.
Still, markets face enormous uncertainty as the fourth quarter begins, with midterm elections looming, tax cuts set to expire Dec. 31, and Europe’s debt crisis threatening to worsen again.
Many investors remain cautious, and that’s reflected in record prices for gold, the classic refuge in uncertain times. The metal rose 5% in the quarter, the eighth straight quarterly gain, and this week closed above $1,300 an ounce for the first time.
The mood over the economy has been a roller coaster in recent months, with the glaring lack of job growth feeding worries that the U.S. would slide back into recession. But Wall Street’s confidence rebounded sharply in September amid data indicating that although the economy wasn’t robust, it wasn’t falling off a cliff.
“The double-dip idea has been taken off the table,” said Jeffrey Saut, investment strategist at brokerage Raymond James in St. Petersburg, Fla.
The market’s rally in September was led by industry sectors that have the most to gain from a continuing recovery, including technology, heavy industry, retailing and small-company shares.
The Russell 2,000 small-stock index jumped 12.3% for the month and 10.9% for the quarter.
Yet stocks’ comeback — if it lasts — may be bittersweet for many risk-averse small investors who have either reduced their stakes in U.S. equities or abandoned the market entirely over the last year in favor of bonds, gold or bank accounts.
For now, millions of investors may be content to stay in bonds, with big-name stocks still lagging bond returns this year.
Americans had begun to turn more optimistic about stocks in March and April, a mood change evident at the time in rising cash inflows to domestic mutual funds.
But confidence was dashed early in May as Europe’s government-debt crisis exploded, triggering a global plunge in markets. And on May 6 the U.S. market suffered the now-infamous “flash crash,” when computerized trading fueled a sudden meltdown in share prices that saw the Dow lose nearly 700 points in minutes, then rebound to close off 347 points for the day.
Stocks’ wild volatility in May was followed in June by fresh doubts about the economic recovery. Although the market snapped back in July, helped by strong second-quarter corporate earnings reports, August brought another wave of pessimism. Wall Street began to fear that the economy could slide into deflation, meaning a sustained decline in prices and wages.
As if economic jitters weren’t enough, investors in mid-August were barraged with warnings about the appearance of the “Hindenburg Omen,” an obscure technical market indicator that was said to have foreshadowed all of the worst stock sell-offs since 1986.
By the end of August, investor sentiment surveys showed that both professional and individual investors were the most pessimistic about stocks since March 2009, when the bear market ended.
That should have been a clue that the gloom had gotten too thick and that too many people were betting on calamity. “Very rarely do we move in the direction of the consensus” opinion, said Art Hogan, chief market analyst at brokerage Jefferies & Co. in Boston.
Likewise, the fact that many investors didn’t join the rally last month — trading volume remained tepid — suggests that there is plenty of money on the sidelines waiting to be lured in, says Raymond James’ Saut.
Despite recurring doubts about the domestic economy, market bulls note that corporate earnings have continued to rebound thanks in part to faster growth overseas. Analysts expect operating earnings of the Standard & Poor’s 500 firms to rise 24% in the third quarter versus a year ago.
At Thursday’s closing value of 1,141.20, the S&P 500 index’s price-to-earnings ratio — a favorite yardstick of market value — stands at 16 based on Standard & Poor’s estimate of full-year 2010 earnings and at 13.4 based on the 2011 estimate. The index’s historical average P/E is about 17 back to 1935.
“Stocks are not really overvalued at this point,” said Andy Engel, senior research analyst at Leuthold Weeden Capital Management in Minneapolis.
The market also has been buoyed by a surge in takeover activity, a sign that corporate executives see relative bargains in equities. The value of takeovers announced worldwide in the quarter topped $722 billion, up 21% from $597 billion in the second quarter and the largest total in two years, according to Dealogic Inc.
What’s more, many on Wall Street are betting that the Federal Reserve will launch an expanded program of Treasury-bond purchases by year’s end in an attempt to keep pushing longer-term interest rates lower, underpin the economy and banish deflation worries.
But a key question is whether the bond market, and the stock market, have already priced in the effect of bigger Fed bond purchases. The 10-year T-note yield ended the quarter at 2.51%, near a 19-month low and down from 2.95% on June 30.
tom.petruno@latimes.com
