Third Quarter Economic Update 2012

Wow – talk about another interesting quarter in the stock market! The Dow Jones Industrial Average rose 4.3% during the third quarter and is up 10.0% through September

30, 2012. The S&P 500 is having an even stronger year, with a 5.8% rise during the third quarter and a 14.6% gain year-to-date. The NASDAQ also had a great quarter, increasing 6.17% and 19.6% year-todate. There are many forces driving these gains:

• Many analysts believe that the Federal Reserve’s efforts to inject money into the financial system will help asset prices continue to go higher.
• Rising dividends are another source of support forthe stock market as many investors continue to reinvest the proceeds. For example, in August,S&P 500 companies paid out a record $34 billionin dividends. (Source: WSJ, October 1, 2012, C1 US Stock Investors Look Beyond)

• Stepped-up efforts to aid the Euro zone, such as the European Central Bank’s plan to buy government debt to reduce some nations’ borrowing costs, gave many investors  confidence to take on more risk, according to many analysts. The Federal Reserve’s September 13, 2012, announcement of new stimulus measures for the U.S. economy also helped in this regard. To the surprise of many investors, many U.S. stockshave nearly come full circle and are going into the finalquarter of this year within shouting distance of all-timehighs. Five years ago on October 9th, the Dow JonesIndustrial Average closed at an all-time high of14,164.53. As of Friday, October 5, 2012, the Dow closed less than 4% below its peak. (Source: WSJ,October 6-7, 2012, B7 What A Trip)

Let’s look at what happened during this five-year period: the stock market halved and then doubled; bonds soared; the real-estate market crashed, then stabilized, and is possibly on its way back; and energy prices spiked, tanked and rose back, too. During this time, the U.S. government racked up massive new debts, and many other global economies also experienced significant changes in their economic pictures.

The 37% drop in the S&P 500 in 2008 was devastating for investors, but since then the stock market has yielded annual returns of 26.46%, 15.06%, and 2.05%. Dividend yield on the S&P 500 has also been steady at slightly above 2%. Many investors who left their money in the market are now ahead of where they were at the end of 2008. Unfortunately, many investors who wanted to keep their money “safe” are shaking their heads as to what to do now. (Source: Bob LeClair’s Newsletter, September 15, 2012)

No one knows whether stocks and bonds will continue to climb or will hit a steep drop, but either way several experts constantly remind us that two important things to consider are:

• It is difficult to consistently time the market,
• and
• Diversify, diversify, diversify!

Many investors are worried about risks looming on the horizon—everything from key fiscal issues in the U.S. to the global economic outlook. The debt crisis in Europe remains unresolved and its economy is stagnating. In the U.S., earnings forecasts have also been reduced. With the presidential election only a few weeks away, major political uncertainty hangs over the U.S., especially when it comes to the Fiscal Cliff, when some very critical economic stimulus measures expire.

With all of these uncertainties, how has the market continued to do so well? There are a number of reasons. “International investors have used the U.S. stock market as a safe haven,” says Lisa Shalett, chief investment officer at Bank of American Merrill Lynch Global Wealth Management. “They see it as a much better place to have been around the world than emerging markets, which have struggled, and a better place to be than Europe.” (Source: WSJ, October 1, 2012, C1 US Stock Investors Look Beyond)