Paul Dietrich's Global Investing Trends Report

Is the Summer Stock Market Correction Over?

Posted July 6, 2011 · 16 Comments

Since the stock market started to decline in late April, I have been telling readers of this Foxhall Global Outlook that we were experiencing a normal and healthy stock market correction—and that is what it has turned out to be.

According to various media sources and industry reports, many investors pulled their investments out of the stock market after it dropped 6% or so in late April and early May. 

That was a serious and costly mistake!

The markets have now fully recovered and all those investors who pulled out of the market are now stuck with substantial losses that will be hard to make up.

Trying to “time the stock market” during the normal up and down corrections within a bull market is almost always a “fool’s errand.”

Thoughtful investors need to put these bull market corrections into some perspective.  There have been seven other drops of 5% or more in the past 27 months without the world coming to an end.  And after each of those seven corrections the stock market went on to make new highs.

 

Warren Buffett’s Advice

When people are making irrational decisions with their retirement investments based on emotion and what direction they think the stock market is heading, I am always reminded of Warren Buffett’s advice.  He said that it only takes two things to succeed as an investor—first having a reasonable investment strategy and second, sticking to it—and it’s the sticking to it part that many investors struggle with.

 

Foxhall’s Dual Investment Strategy

We believe that one of the main ways to navigate this brave new world is first, with the Foxhall’s Dual Investment Strategy.  It keeps investors largely invested during long-term bull markets and once a long-term bear market is identified, moves investors out of stocks and into cash, treasury bonds or other investments that attempts to protect principal.

Second, we believe that every portfolio should have a significant exposure to commodity and commodity producers like oil, gold and other precious metals, in order to try and protect clients against unforeseen and unpredictable  “Black Swan” disasters and seek to protect the purchasing power of client accounts against the ravages of inflation.

At Foxhall, we were able to take advantage of the correction last month in commodity prices by raising commodity exposure from  10% to 16% of the equity allocations.

We believe this change will help our clients navigate future corrections with a higher margin of safety in our sometimes fragile and uncertain economy.

In the last issue of Global Outlook I said, “While it is impossible to predict the future, in a month or two, investors may very well look back and see this stock market and commodity pullback as a good buying opportunity.”  That is exactly what it turned out to be!

 

Investors Need To Differentiate Between Fundamentals & Political Issues

Currently, most analysts see this summer’s problems with Japan’s recovery from the earthquake, tsunami and nuclear crisis, the European financial crisis, politicians “playing chicken” with the debt ceiling vote, as short-term transitory problems that will be solved one way or another over the next couple of months.

Investors should remember they cannot directly invest in the U.S. Debt Crisis or in the European Greek bailout.  Investors can only invest in stocks and bonds.

It is important to be able to differentiate between short-term political issues that are negatively affecting the stock market and the underlying fundamentals of a particular stock.

 

Basic Stock Market Fundamentals Are Turning Up

Here is what the long-term fundamentals of the stock market tell us now:

  1. U.S. company fundamentals are improving in almost every area.  Manufacturing is rebounding at a 15% annualized rate over the past 3 months.  S&P 500 companies are now holding a record $1.1 trillion in cash.  This cash has the potential to add a lot of momentum to the markets and to the economy in the form of increased dividends, share buybacks, mergers and acquisitions activity and capital expenditures.

  2. U.S. state and local tax revenue rose 4.7% in the first quarter, which is the sixth straight quarter of growth and a good sign the U.S. economy is mending.

  3. Long-term economic trends are positive and solidly in place.  Yes, the U.S. economic recovery is mediocre but the U.S. economy is still growing and there is little chance, short of some unforeseen economic disaster, that could cause the U.S. to slip back into a double-dip recession.

  4. Asian economies are slowing and this is very good news.  This means that Asian Central Bank policies are working.  Asian Central Banks have been raising interest rates for over a year in an effort to slow Asia’s unsustainable growth rates to a more sustainable 6% to 9% growth rate.  Their policies are working and many Central Banks are signaling that they will stop raising rates over the coming months.  When this happens, I believe Asian and emerging stock markets will take off.

  5. Commodities are still in a 10-year to 15-year long-term bull market.  Even if underlying economies like China are trying to reduce their growth rate from 12% to 9%, that doesn’t necessarily signal a slow down in their consumption of commodities.  The vast majority of commodity buying is by Asian governments as they are building long-term infrastructure projects like super highways, power plants, airports and new electrical grids.  These projects also provide jobs, so they are unlikely to slow even if the overall local private sector economy is slowing.  Many Asian governments have large surpluses to pay for these massive infrastructure projects.  I believe commodities will continue to be in demand and continue to rise over the long-term.

 

Where Will The Stock Market Trend Through the End Of 2011?

We could see some significant nervousness in the market as the republicans and democrats “play chicken” up to the very last minute before they have to vote to raise the U.S. debt ceiling. This artificial political drama could cause great anxiety in the stock market as newspaper and TV pundits publicly worry about the U.S. government defaulting and causing a major global economic crisis.  There will be a lot of “the sky is falling” rhetoric!

As Winston Churchill once said, “the Americans will always do the right thing, after they have tried everything else.”  As usual, there will be an 11th hour last minute “face-saving” deal and our brave politicians will declare victory by raising the debt ceiling once more.

Again, this is another artificial political crisis and investors need to ignore all the noise and focus on company and economic fundamentals that ultimately drive the long-term stock market trends.

 

The Bull Market Trend Is Firmly In Place

The bottom line is that analyst estimates for S&P 500 company profits for this quarter are expected to be up 15%.  Overall profits for 2011 are expected to be between 13% and 15% with most of those profits coming from Asia and other emerging markets.

While it is impossible to predict the future, I believe the stock market will end the year with double-digit gains.   Foxhall’s proprietary  Trend Identification Technology affirms the persistency of the long term uptrend and is directing the equity allocations to be near fully invested.  Nervous investors might be assuaged with a reminder that the trend analysis is done every day! 

So to Warren Buffet’s advice:  Foxhall executes a thoughtful investment strategy.  Knowing that Foxhall’s Trend Identification Technology and ‘dual investment strategy’ seeks to provide solutions for good markets and bad, should provide investors some assistance with the challenge of sticking to it!

 

Patience! 

—Paul Dietrich
dietrich@foxhallcapital.com

 

 

 

Disclosures: 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. Past performance is not a guarantee of future performance.

Foxhall Capital Management, Inc. is a registered investment adviser with the U.S. Securities and Ex-change Commission (SEC) under the Investment Advisers Act of 1940. The firm is defined as the Foxhall Capital Global ETF, 401(k) and Stock Series divisions, which manage a variety of ETF, 401(k) and Stock strategies in bundled fee and non-bundled fee accounts for primarily U.S. clients. The firm was redefined as of 12/1/08 due to the creation of the 401(k) Series division. A complete list and description of all firm composites and their compliant presentations are available upon request.

Foxhall Capital Management, Inc. claims compliance with the Global Investment Performance Standards (GIPS®). Foxhall Capital Management has been GIPS verified for the periods 12/31/99 – 12/31/08 by Beacon Verification Services. The ETF Series composites have received a performance examination for the period since inception through December 31, 2008. A copy of the verification report is available upon request.
 


 


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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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