September 2009 Recap

Many investors fretted about September based on its historical record, but the S&P 500 managed its seventh con­secutive monthly gain. Growth continues to outperform Value due to the technology sector, which has been viewed positively through­out the recession thanks pristine balance sheets and historically low inventory levels. Following a sluggish August, Emerging Markets topped all asset classes this month with a gain of 10.2%. Close behind was the Pacific ex-Japan region, which returned 9.69% on the month. Treasury yields held within a tight range and ended the month slightly lower, while credit spreads improved to make corporate bonds the best performing sector in fixed income.

Good news continues to be magnified while bad news is ignored – a drastic change from the beginning of the year. Meanwhile, sell-side analysts are busy raising index targets to catch up to the market level and explaining why they aren’t selling as their existing targets have been reached. With incredible amounts of liquidity sloshing about global markets, the Fed announced plans to slowly pull back on a number of its liquidity programs. The Fed’s purchases of Treasurys are set to end in October and the buying of mortgage and agency debt will cease at the end of the first quarter of 2010. The pull back by the Fed is calming to inflation hawks, but caution still reigns as the economy is weaned off of government support.

There is no denying that this has been a rally of market sentiment rather than pure fundamentals. The one posi­tive factor is the investing community’s reluctance to embrace the rally energetically – inflows into bond funds have been staggering, but those into equity funds have been tepid. When the masses are positioned for a sell-off, it means there’s a lot of ammunition for a rally if the market doesn’t cooperate. The fact of the matter is that investors are more worried today about missing money-making opportunities than about risking any invested capital. It is difficult, however, to ignore the increasingly convincing bear case and we seem well overdue for a pullback. Of course, the market has a history of remaining overvalued for extended periods of time and it is impossible to determine when this turning point might be.

--

Peter J. Lazaroff, Investment Analyst