September Cruel Once Again

It was a brutal week for stocks, suffering their worst set back since the fall of 2008 on disappointing news from the Fed and more weakness in the Euro zone. For the week the Dow fell 6.4% while the S&P500 shed 6.5%.

The inflection point came on Wednesday afternoon after the Fed failed to impress the Street with its latest round of monetary stimulation designed to push interest rates even lower. Although that sounds great on the surface, the reality is that rates have already been super low for years, so nudging them just a little lower simply isn’t enough to juice the market or economy.

The Fed also made it know that it had become more bearish since its last meeting, noting that it sees “significant” risk to the down side, which is an elevation to their previous statement of just seeing regular risk to the down side.

So as you can see, the Fed did little to make anyone feel comfortable buying stocks. And when you throw in additional weakness coming out of the Euro zone, a never ending saga of bailouts and insolvency, the market is dealing with an abnormal amount of uncertainty.

Looking forward, it’s not all doom and gloom. This has been a very tough stretch for the market, but there is still reason for optimism. The first is earnings, which are set to kick off next week. Although stocks have been getting hammered, we haven’t seen any sharp downward revisions in estimates and we haven’t heard many companies warning on disappointing results. As has been the trend, earnings continue to be the bright spot of the recovery, as the S&P500 now gets more than 40% of its earnings internationally and continues to decouple from the domestic economy.

That means valuations are very compelling here. Keep in mind, the S&P500 is back to peak earnings from 2007, but back then, the averages were trading at a 30% premium to where they are today. So for investors with a longer time horizon, opportunity is at hand.

So in spite of another tough stretch for stocks, it’s not time to throw in the towel. So let’s stay patient and stick with our plan and look for good things to happen.

Updates:

Even though it was a tough week for the averages, defensive names and sectors performed well as investors shifted into more conservative segments of the market.

That gave McDonald’s Corp (MCD) a boost, falling just 1% on the week for a solid out performance. It also helped Buckeye Partners (BPL), the pipeline MLP with a 6% dividend, down 1% as well for an out performance of its own.

But there was also plenty of weakness, with energy stocks taking it on the chin. That left Baker Hughes (BHI) down 16% on the week and Cimarex Energy (XEC) off 15%. Energy stocks have really fallen out of favor with the market lately as investors continue to worry about growth. But even though it’s been a tough stretch, estimates have held up well as the analysts still recognize sharp earnings power from highly insulated companies. That has BHO trading with an absurdly low forward PE of just 8X. So anyone searching for long-term value should take a look at the energy complex.

We also saw a sharp sell off in gold, down close to $200 from its weekly high to close at $1,660. No doubt that was driven by some profit taking on the big run up over the last few months. But hedge funds and investment banks were also fielding huge redemptions as stocks traded sharply lower, forcing them to liquidate positions and raise cash. That pushed Deutsche Bank Double Gold (DGP) down 18% on the week while Market Vectors Junior Gold Miners (GDXJ) was down 19%. Looking forward, we know that the central banks of the world will continue to print money in order to fund their deficits and pay off their debt. So the long-term trend is still bullish, and until that changes gold is still a good place to look for outsized gains.

And finally, to end on a high note, we have Apple, Inc. (AAPL), one of very few stocks closing in the green with a 1% gain. AAPL actually saw a new all-time high early in the week, with shares trading above $420. That has a lot of people saying Apple is expensive. Ya, $420 is a large cash outlay for a stock, but relative to earnings, shares have tons of value, with the company expected to make over $30 this year. And with the iPhone 5 coming soon, and analysts expecting gang buster sales of more than 50 million, this is still the hottest technology company on the Street.

That’s all for this week, but until next time, here is an article from one of my favorite authors on MarketWatch discussing how panic creates opportunity. Enjoy.

Tune Out the Fear and Panic

Your Investment Partner,

Mike

ABOUT THE AUTHOR

Michael Vodicka

Michael Vodicka is the president and founder of the Vodicka Group Inc., a licensed investment advisor (Series 65) and a financial journalist.