Paul Dietrich's Global Investing Trends Report

Are You Moving Portfolios To Money Markets Or Bonds?

Posted July 30, 2007 · 0 Comments

Dear Paul,

 

The stock market had a major downturn last week.  Have you moved your portfolios to money market funds or bonds? 

 

The answer for now is “no”.

 

Last week the DOW JONES INDUSTRIAL AVERAGE ended the week with a two-day loss of more than 500 points. The steep drop was sparked by continuing worries about the health of the mortgage and corporate lending business and weakness in the housing market.

 

When markets are selling off it is sometimes hard to keep focused on the big picture: HOW IS THE OVERALL U.S. ECONOMY DOING? AND THE ANSWER IS FINE.

 

FOCUS ON THE BIG TRENDS   

 

One has to keep these stock market corrections in some perspective. Here is how I look at it:

 

STOCK PRICES: Even with the big sell-off last week, the S&P 500 INDEX is just  about the same price as it was a month ago.

 

THE OVERALL  ECONOMY  IS  BOOMING: More than two-thirds of the companies reporting earnings over the past few weeks have beat analyst’s estimates.

 

Corporate earnings are much better than expected because of rising international sales. Unemployment is at an historic low and real wages are rising. We still have relatively low inflation and low mortgage rates and many people believe that the subprime lending crisis may cause the Federal Reserve to lower interest rates in the near future and that would cause a major rise in the stock market.

 

STOCK  MARKET  UPS  &  DOWNS  THIS  SUMMER  AND  EARLY FALL:  As I mentioned in the FOXHALL GLOBAL WEEKLY report several weeks ago on July 16, 2007, I said,  “don’t be surprised if there is a major correction soon as institutional investors lock in profits for the year. This is normal after a big run-up in the indexes, especially as we head into the historically two weakest months of the year for the stock market; September and October”.

 

SELL-OFF  STOCK MARKET  CORRECTIONS  ARE  NORMAL IN  SUMMER  AND  EARLY  FALL:  I’ve been doing a lot of analysis since the stock market declined last week, and all of my research reveals that we’ve had a market correction every summer and fall since 2004. Last week, I believe we experienced our summer/fall 2007 correction.

 

Since the current bull market began in 2003, we’ve seen a fairly regular seasonal pattern that starts with big gains occurring in the fourth quarter of the year and the first half of each new year. Natural corrections seem to take place each summer and fall after the market goes up too much too quickly.

 

This pattern is so consistent that the size of the correction is nearly the same every year. Each year, the market tends to sell off between 7% and 9%. If you take a look back at 2004, the S&P 500 INDEX sold off 8.8% in the summer because of rising technology inventories and rising interest rates. In 2005, the S&P 500 INDEDEX sold off 7.6% during that period-once again because of interest rate concerns. This pattern repeated itself last summer when the S&P 500 INDEX sold off 7.7% in a sharp correction.

 

THE BIG PICTURE

 

History shows that in the long-term, the stock market always follows the economy. If the economy is going down into a recession, the stock market will go down too. But when the economy is doing well, AS IT IS RIGHT NOW, the stock market will always go up over the long-term following that up-trend in the economy.

 

SUMMARY  

 

While we at FOXHALL CAPITAL expected this short-term correction between now and October, and there may be continuing volatility in the market through the end of October,  but barring some geo-political crisis, we expect the stock market to climb higher by the end of this year.

 

So long as the economy continues to expand, this current correction will be a temporary blip and the market will recover later in the fall. Unless there is a major change in the economy, Foxhall will remain fully invested in its current models. We only take major defensive action in client portfolios by moving fully to bonds when economic statistics and our FOXHALL computer model indicates a major change in the

economy that shows we are moving into a bear market or recession.

 

Until next week………

 

-Paul Dietrich

dietrich@foxhallcapital.com

 

Disclosure: The opinions and portfolio information provided in the FOXHALL GLOBAL OUTLOOK are subject to change at any time, and are not to be construed as advice for any individual nor as an offer or solicitation of an offer for purchase or sale of any security. Client accounts may differ from model allocations due to many reasons. All investment strategies offer the potential for loss as well as gain. Individuals should consult with their financial professional to determine an investment strategy appropriate for their objectives, risk level, and time horizon prior to investing.

 

 


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About Paul Dietrich
Paul Dietrich is the Chairman, CEO and Co-Chief Investment Officer of Foxhall Capital Management, Inc. (Foxhall).  Foxhall currently manages investments for individuals, mutual funds and private institutions throughout the United States. Paul Dietrich is also a portfolio manager to a publicly traded mutual fund, the Foxhall Global Trends Fund.
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