The third quarter of 2011 marked one of the biggest quarterly stock market declines in history, rivaling those we saw prior to the Lehman collapse in 2008. The S&P 500 fell 13.81% last quarter, and is down 17% from its high on April 28th. Foreign stocks fared even worse for the quarter, with the EAFE (foreign) Index down 21%. Amateurs and professionals alike have found the last three to six months to be the most difficult of their careers, including Donna and me.
The general economic sentiment at the beginning of the quarter was that the dollar and U.S. treasuries were going to collapse. You may remember we disagreed with that belief, which greatly helped our clients’ portfolios. The dollar and treasuries both rallied, despite the fact that Congress raised the debt ceiling, and Moody’s downgraded our nation’s credit rating.
The good news is that our clients’ portfolios fared very well in the third quarter, considering the extreme levels of market volatility. Year-to-date, our portfolios are essentially flat, while stock markets are down about 8 percent through September 30th. Our positions in the bear market fund and the U.S. dollar helped contain volatility.
Although gold has been a helpful asset in client portfolios for many years, it was not our friend during the month of September. It was the largest contributor to negative returns for the month, declining over 11%. However, gold is still up over 8% for the quarter. Our long-term outlook for gold is still bullish, despite the fact that we believe the economy may be in a deflationary cycle. Our long-term target price for gold is between $2,500 and $3,500 per ounce. Bull markets in gold tend to last 16-20 years, and we are only 10 years out in the current bull market.
We recently took a minor position in small cap stocks in our clients’ portfolios, in anticipation of seeing a short term bounce in stock prices. The Europeans may make a last-ditch effort to shore up their sovereign debt crisis, which could spark some sort of rally in stocks, but we still believe the trend of the stock markets remains downward. There is growing underlying evidence that shows economic decline is mounting on a global scale.
We may increase our position in the US dollar if we continue to see issues in Europe degenerating. We may also increase our position in gold if we believe the downward trend is going to reverse itself and move up again. We are diligently monitoring our clients’ portfolios as we attempt to navigate through the most significant series of economic calamities we have seen in quite some time.
John L. Brotherton, CFP®