Still a bit skittish of the bull market
Investors are pleased that the third-quarter Dow has recovered from its July slump. What lies ahead?
from the October 10, 2007 edition
Page 3 of 3
A decade ago, many emerging economies were burdened with international debt, and their foreign-exchange reserves were skimpy. After several years of rising commodity prices, moderate inflation, and soaring trade surpluses, they are less tightly correlated to US market swings, according to Mr. Melendez.
Among sector funds, natural resources led the pack, rising 7.2 percent. Energy-related stocks, in a strong uptrend for more than three years, fueled the sector's gain as crude oil quotes touched record levels . Gold funds also sparkled, extending a three-year-long winning streak, with an 18.3 percent gain. The greenback's decline, which accelerated following the Fed's rate cuts, made gold more affordable to foreign buyers.
"It's a hard asset and inflation hedge," says Satlow. "Still, you probably don't want gold to be more than 5 percent of a diversified portfolio."
Reasons to be bearish
Looking ahead, some advisers urge investors not to get too complacent because of the market's September snapback. "Despite the likelihood of additional Fed rate cuts before year-end, the risks in this late-stage bull market remain elevated," warns James Stack, editor of Investech Research, an investment advisory service.
The Fed's easing of rates has given stocks a boost, but it may only be temporary, he says. With "housing in a free-fall" and consumers pinching their pennies, "the economy can't be assured of a soft landing," Mr. Stack says.
The Fed doesn't have as much room to maneuver as it did in 2001 when a long string of rate cuts helped prevent a lengthy recession. This time, the Fed must worry about a sagging dollar, which adds fuel to inflationary forces, Stack says. An advocate of capital-preservation strategies, he recommends that no more than half of one's portfolio be in stocks at this time – mainly in recession-resilient industries like consumer staples and healthcare – and more than 30 percent be held in US Treasury bills.
Although the fourth quarter is historically an upbeat one, says Fred Dickson, chief strategist for D.A. Davidson in Great Falls, Mont., "the bulls have their work cut out for them this time." With a troubled financial sector, oil prices remaining above $80 a barrel, and housing in a deep recession, the economic outlook doesn't look so good. Corporate third-quarter earnings reports will have "a lot more unpleasant surprises," he says.
Still, with more than $2 trillion held in money-market accounts, investors have plenty of cash on the sidelines – a "potentially bullish sign," says Mr. Dickson. "With stock valuations at historically reasonable levels, a major stock setback is unlikely."
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