October 2009 Update

Market Recap

Equity prices continued to rebound significantly during the third quarter of 2009.  All major indexes were up double digits for a second consecutive quarter.  The Russell 2000 Index and the NASDAQ Composite led the way, gaining 18.9% and 15.7% respectively.  We continue to believe that the market established a bottom on March 9, 2009.     

The Federal Reserve Bank (Fed) left key short-term lending rates unchanged during the third quarter.  The Fed remains focused on economic recovery as unemployment remains a problem.  There are no signs of change in monetary policy through the end of 2009.  Short-term rates will remain low until further signs of economic recovery begin to appear.

Unemployment moved higher during the third quarter to 9.8%.  Corporations will delay employing additional workers due to uncertainty with the recovery and geo-political concerns.  Although employment is a lagging indicator, job gains will be very slow, as companies focus on cost containment to fuel earnings growth.      

The Numbers

Third Quarter 2009:
The S&P 500 Index gained 138 points or 15.0%.
The Russell 2000 Index gained 96 points or 18.9%.
The NASDAQ Composite gained 287 points or 15.7%.

Indexes                                 9/30/09         12/31/08     QTR %Chg   YTD %Chg
S&P 500                                1057.08           903.25         15.0            17.0
Russell 2000                           604.28           499.45         18.9            21.0
NASDAQ                                2122.42         1577.03         15.7            34.6

U.S. Treasury yields declined slightly during the third quarter.  Rates have leveled off as investors are taking a wait and see attitude with the economy and continue to seek the safety of U.S. Treasuries.

Yield                 09/30/09       12/31/08     QTR Chg      YTD Chg
1 Yr Treasury     0.40%           0.27%        -0.16%         0.13%
5 Yr Treasury     2.31%           1.55%        -0.23%         0.76%
10 Yr Treasury   3.31%           2.25%        -0.22%         1.06%

The Federal Discount Rate remains at 0.50% vs. 2.25% a year ago.
Conventional FHA 30 year mortgage rates declined, to an APR 5.19%.
The unemployment rate continued to increase to 9.8% during the third quarter of 2009.

Summary

The indexes have achieved significant gains over the past two quarters.  From trough-to-peak, we have seen the following moves:

Dow Jones Industrials   +52.6%
S&P 500 Index              +60.4%
NASDAQ Composite      +69.0%
Russell 2000 Index       +81.3%

Further advances in the equity markets could be somewhat subdued for the balance of 2009.  Markets appear to be fully valued, and further gains will be tied to improvements in earnings and unemployment, which should show signs of improvement in 2010.  We feel a u-shaped economic recovery will be more likely than a v-shaped recovery for the following reasons:

1.  Continued growth in unemployment.  Corporations will delay hiring new workers until clear signs of recovery are in place.
2.  Top line profit growth will be challenging without a pickup in consumer spending and capital investment.
3.  Unknown costs of the pending health care legislation.
4.  Unknown costs of the pending cap and trade legislation.  
5.  Instability in the Middle East.

We encourage investors to continue with a disciplined investment strategy. With the current interest rate environment, risk assets such as equities are becoming a preferred asset class investment.  Investors need to remain diversified across all asset classes and remain focused on long-term goals for accumulating wealth.