Stock Market Report: Focusing on the bigger picture

Written by Lloyd H. Dotson
Saturday, 07 November 2009 00:00

Financial markets retreated a bit in October, taking a breather from their rapid ascent and causing many investors' portfolios to give back some of the gains they had racked up in recent months. The domestic economy, however, continued to show signs of rebounding from the longest recession in decades, as both an improvement in fundamentals and stimulative governmental policies contributed to an uptick in activity.

Yet doubts lingered in some circles about the strength and sustainability of the recovery-and will likely keep policymakers in an accommodative stance for the foreseeable future. Internationally, economies and markets rebounded strongly, highlighting what could well be the driver of the next phase of global economic growth.

Big is better

Domestic stocks fell broadly in October, but the declines were most acute among smaller companies that had benefited most strongly from the recent rally. The small-cap Russell 2000 Index lost 6.79 percent for the month, while the Russell Midcap Index declined 4.40 percent.

The S&P 500 and the Dow Jones Industrial Average, both indices of large companies, fared much better, falling a more modest 1.86 percent and 2.58 percent, respectively. International stocks proved the most steadfast last month; the developed market MSCI EAFE Index lost 1.24 percent, and the MSCI Emerging Markets Index, bucking the losing trend, gained 0.13 percent, as many emerging economies showed greater resilience than their more developed counterparts.

Despite last month's pullback, as well as turmoil earlier in the year, 2009 has thus far been rewarding for investors. The S&P 500 has risen 17.05 percent year-to-date, the MSCI EAFE has gained 27.97 percent, and the MSCI Emerging Markets is up a noteworthy 65.10 percent.

Positive signs

Economic data, while not universally positive, continued to show improvement or expansion on several key fronts. Residential housing, for example, the trigger for the recent economic calamity, has emerged from the doldrums lately. When compared with one year prior, sales of existing homes have grown for the past three consecutive months-the first such streak since autumn 2005.

And the manufacturing sector, which had been hit so hard during the downturn, has also staged a rebound. Monthly orders for new goods have expanded for four of the past five months, and the ISM Manufacturing Composite Index, a measure of overall manufacturing activity in the U.S., has risen steadily since bottoming out in December 2008. Even the much-beleaguered U.S. automobile industry has contributed to the rebound, as Ford Motor Company has ridden the heels of the "cash for clunkers" program to its first quarterly operating profit since the first quarter of 2008.

Recovery drivers

This trend is consistent with what we expect to see play out in the coming quarters-namely that a continued stabilization in the housing market, and a recovery in business investment resulting from depleted inventories being rebuilt, will be the main drivers behind growth in gross domestic product. Notably absent in the near-term are consumers; we expect that personal consumption will lag for some time, as households grapple with an environment of tight credit conditions, high unemployment, and falling incomes. In the longer term, it is likely that consumers will need to play a bigger role in sustaining a recovery and that the domestic housing market could face additional hurdles.

But while the short-term ebbs and flows of the market make good fodder for business television, investors are much better suited to focus on a bigger picture, as well as their own personal goals. The global economy is undergoing a seismic shift-away from growth fueled by debt-financed consumption and toward a new horizon. When we look to that horizon for what the next global growth drivers will be, we see rapidly growing economies in Asia, Africa, and South America that will produce the next generation of consumers, fueling prosperity for the companies that serve them.

There is also unlimited potential for innovation in fields like biotechnology, nanotechnology, alternative energy, and bio-agriculture-industries that are poised to solve the problems of not just today, but of tomorrow.

So while it is easy for investors to fall prey to the concerns of the day, it is also essential to acknowledge, and also to invest in, a future that holds much promise.

Ridgefield resident Lloyd Dotson is senior managing partner - wealth strategies for Harvestwealth Partners LLC, 161 Cherry Street, New Canaan.  He may be reached at 888-754-4567 ext. 102 or email  This e-mail address is being protected from spambots. You need JavaScript enabled to view it