Rockbridge Named #81 on CNBC's Top 100 Fee Only Wealth Mgmt Firms List
Oct 11

Market Analysis

by Craig Buckhout

Renewed fears of a double-dip recession, policy paralysis across the U.S. and Europe, and the looming threat of a financial crisis in the euro zone combined to create very volatile markets and a devastating quarter for equities.

Equity Markets
The third quarter of 2011 saw the value of small stocks and international stocks fall more than 20%, which is generally considered a bear market correction.  Large domestic stocks (S&P 500) did a bit better but fell nearly 14% in the quarter, dropping into negative territory for the year at -8.7%.

Fixed Income
Government bonds, on the other hand, had a stellar quarter, defying logic and many experts’ expectations, by rising in value after S&P downgraded the U.S. Government debt rating.  The broad bond market index, which is dominated by government securities, rose 4.7%.  The value of TIPS (Treasury Inflation Protected Securities) rose even more than the general bond market, as hope for economic recovery diminished, and action by the Federal Reserve drove expectations for real interest rates further into negative territory.  Based on the pricing of Treasury securities, and TIPS, the market now expects inflation to average less than 1.8% over the next ten years with ten-year government bonds providing a return above inflation of a meager 0.20% on average.  Government bonds of shorter maturities are expected to provide returns less than inflation, so investors’ purchasing power will diminish.

Return Expectations
We cannot predict future returns, but it can be instructive to examine assumptions built into current market pricing.  As mentioned above, the expected return on ten-year government bonds is barely above the expected rate of inflation, driven by dismal expectations for economic recovery, extremely accommodative monetary policy, and fear of another financial crisis coming out of the euro zone.  This is well below the long-term average, which is about 2% above inflation.

Stocks on the other hand appear priced to provide future returns more consistent with their long-term risk premium of 6-8% above inflation.  The S&P 500 index is at a price level first achieved in 1998, but since that time the Price/Earnings Ratio for the index (price paid per dollar of expected earnings) has fallen dramatically.  So today’s price reflects a lower, and perhaps more realistic, assumption of growth in dividends and earnings.

About the Author

Craig Buckhout is a Chartered Financial Analyst, and Principal at Rockbridge Investment Management.  “In the early 1990s it became clear to us that ordinary people were going to need help managing their substantial savings, as 401(k) plan assets began to replace pensions as a source of retirement income. After spending the first decade of my career in the world of corporate finance, I was excited to work with clients and apply institutional investment principles to help them achieve their goals.”  Craig holds his BS & MBA from Cornell University, and is a member of the SUNY ESF (College of Environmental Science and Forestry) Foundation Board – Treasurer, CNY Community Foundation – Board Member.
Learn more and/or Contact Craig


You Might Also Like

Other articles filed under Investing

Market Commentary – April 2019

April 24, 2019
Stock Markets Stocks rebounded nicely. Tech stocks (FANGs – Facebook, Amazon, Netflix, Google) after leading the way down in last year’s fourth quarter (off 22%) led stocks back up (up 23%). A global stock portfolio earned about 12% this quarter...
Continue Reading

Long-Term Disability Considerations

April 22, 2019
Many of us are familiar with insurance for your home, auto and life, but the reality is - we don't often know our specific coverages until we need to make a claim.  Insurance has become so specific it’s worthwhile to...
Continue Reading

Where Is The Value?

April 19, 2019
It’s no secret that since the Financial Crisis value stocks have underperformed growth stocks.   Many theories exist as to why this has happened, none of which can be confirmed as truth.  This begs the question “what does this last decade...
Continue Reading

Life Events to Consider

April 17, 2019
If you’re like most people, you know that planning to achieve your financial goals involves more than just budgeting and saving for retirement. You’ve undoubtedly received financial advice, solicited or otherwise, from some combination of family, friends, coworkers, or even...
Continue Reading

New York State Office of Unclaimed Funds

February 8, 2019
Over the summer, we had a client ask if there was a place to look for existing accounts or funds they or family members may have accumulated and forgotten about over the years. That sparked Julie’s memory of the New...
Continue Reading

‹ Back to Blog Home

getting started is simple

315.671.0588 info@rockbridgeinvest.com Schedule a meeting Sign Up for Our Newsletter