|We wanted to provide an update on the equity-market selloff, which we are closely monitoring.|
It's easy to get negative in this environment. We see panic in the market and resiliency in many parts of the economy. We admit growth is anemic, but let's consider what we've been through this year.
The S&P 500 is one of the most commonly used benchmarks for the overall U.S. stock market. The Dow Jones Industrial Average (DJIA) was at one time the most renowned index for U.S. stocks, but the DJIA contains only 30 companies. The S&P 500 is a better representation of the U.S. market. For most, it is the definition of the market. For the first seven months of this year, the S&P 500 has been trading in a range of 1250-1350 (an approximate 8% swing).
We consider an 8% swing a fairly "resilient" marketplace considering these recent events:
Yesterday, the trading range changed for the worse as the S&P broke through a key support line.
- Japan, the 3rd largest economy, was hit with an earthquake, caused a nuclear meltdown and crippled the Japanese economy along with global supply lines.
- Disruption in oil supply lines as rebellions across the Middle-East sprung up.
- More than one European nation has needed a bailout to avoid defaulting on their debt with more to follow.
- As a nation, we are involved in several military conflicts along with a new conflict in Libya.
- On the domestic front, we've had an anemic jobs picture.
- Don't forget, the "mother of all debt ceiling" showdowns.
While we acknowledge the risks that the economic slowdown and sovereign-debt crisis pose, notably Italy, we still see positive signs in the U.S. economy. A recent report by Morningstar® estimates that the S&P is now trading about 20% below its cumulative intrinsic value. Keep in mind that corporate earnings have generally been strong during this last quarter.
Right now, we believe our biggest concern is the Euro zone and a potential collapse of its banking system. Ultimately, we expect a bailout and a capital injection into their banking system.
In closing, we find it fascinating that Treasuries have soared over the last couple of days during this flight to quality. Just days before, Treasuries were facing a downgrade in credit quality. What a difference a few days makes! We will continue to keep an eye on things.