Stocks Snap Back, but Investors Are Jittery

08/10/2010 12:01 pm EST

Focus: MARKETS

Janet Brown

Editor, NoLoad Fund*X

Janet Brown, editor of NoLoad Fund*X, says stocks have rallied since July, but investors should stick to their plans and balance growth against safety.

Stocks rebounded from their second-quarter drubbing with a powerful July rally. Just when the outlook was dire and investors were tempted to throw in the towel, stocks turned and enjoyed their best monthly gains in a year: 7.2% for the Dow Jones Industrial Average; 7.0% for the Standard & Poor’s 500 index and the Nasdaq [Composite index], and 6.9% for the Russell 2000. Yet coming on the heels of a steep correction, stock market gains are elusive [so far this year].

After early weakness, the broad market S&P 500 surged 16% from its February low to an April peak, and then tanked 16%. Many foreign and small-company stock indexes dipped into bear market territory (a decline of 20% or more). Then, amidst renewed fears of a double-dip recession, the market bounced in July, pulling back up to near flat for this year to date.

The broad market now stands 67% above its March 2009 low, but remains about 25% below its all-time high in 2007. After the deepest recession since the 1930s, it’s a long way back. The economy grew at a slower pace than expected in the second quarter, and revisions to [gross domestic product] showed the recession was even deeper than thought.

While many measures of economic activity are pointing in the right direction, there is still much concern about high deficits and lingering unemployment. The Economic Cycle Research Institute’s (ECRI) Leading Index shows signs of slower growth, but they do not predict a double-dip recession.

It’s easy to get caught up in the worrisome news about the debt, weak consumer spending, and lack of confidence. Yet, the new austerity is not a bad thing.

After nearly three decades of decline, personal savings rates are up. Cash available for investments, both corporate and noncorporate assets, fuel markets. Corporations are as lean as they’ve ever been, and they have more cash than they’ve ever had. Earnings reports have been good. So far, three out of four companies beat their second-quarter earnings estimates.

Looking at stock market returns over the past ten years is not pretty. We are now at levels first reached over 11 years ago.

Yet don’t let the recent past color your judgment too much. It can be dangerous to make big allocation moves, particularly in such volatile markets, in response to market extremes.

If recent market volatility proved too much to take, it’s time to reassess your balance between growth and safety. We believe that investors who have taken on more risk than is needed or desired might be well-advised to take advantage of the recent rally to adjust their asset allocation toward lower volatility investments.

We find that investors who remain balanced between growth and fixed income generally are more successful in sticking with their plans.

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