In This Corner: Financial markets not off the wild ride just yetReview of financial quarter shows some winners
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share thisAs we enter the home stretch for 2009, let's review what transpired in the financial markets over the past three months.
Rising a stunning 15 percent, Standard & Poor's 500 index scored its largest quarterly gain since 1998, according to The Wall Street Journal. International markets did well, too, as the Dow Jones global index, excluding the U.S.Total Stock Market Index, rose 19.2 percent in the third quarter. The gains reflected continued improvement in some aspects of the worldwide economy, as well as anticipation that the improvements will continue.
Year-to-date, worldwide stock market returns have been remarkable. Since the March 9 low, global stock markets have added about $20 trillion in market value, according to an Oct. 4 Bloomberg article. Now that's what we call "stimulus."
Here are some of the winning markets over the past three months, based on the Dow Jones global indexes and ranked by U.S. Dollar performance: Lithuania, 71 percent; Estonia, 50.3 percent; Hungary, 39.1 percent; Peru, 35.6 percent; and Cyprus, 35.6 percent. Other notables based on the Dow Jones Global Indexes are: Brazil, 29 percent; Russia 26.3 percent; India, 18.3 percent; U.K., 17.7 percent; and China, 10 percent.
Disappointed with low short-term rates and meager returns from perceived safe investments such as money market accounts, many investors fled the short end of the yield curve and moved out to the longer - and riskier - end. So far, that has paid off as bond prices generally rose in the third quarter, according to The Wall Street Journal.
If inflation becomes a problem or the dollar goes into a freefall, you could see interest rates reverse course and start to rise. Of course, that could lead to a potential setback for the economy so the government is trying to walk a fine line between flooding the economy with liquidity - to help it grow - but not flooding it too much that it would lead to rampant inflation.
With the significant decline in most interest rates over the past few months, investors appear comfortable with how the government has walked this fine line. However, there is a definite concern that down the road, perhaps one to three years from now, we could be in for inflation that rivals the worst of the late 1970s/early 1980s period.
Big budget deficits, concerns about inflation, and a desire for riskier assets helped push down the value of the dollar last quarter. According to The Wall Street Journal, the dollar dropped 4.1 percent against the euro, 6.8 percent against the Japanese yen, and 9.5 percent against Australia's currency.
In an Aug. 18 op-ed piece in The New York Times, Warren Buffett opined that a continued rise in the debt-to-GDP ratio could cause the U.S. dollar to "melt." When Mr. Buffett gets involved, you know it's time to take notice. Fortunately, if the dollar does liquefy beyond recognition (i.e., "melt"), other investments may rise in value and we would do our best to position for that accordingly.
To say it's been a wild ride in the financial markets this year is an understatement.
We started the year with a massive decline and then after March 9, the markets exploded to the upside on faint signs of economic stabilization. While parts of the economy are working better, unemployment is staying painfully high. Some economists expect unemployment to hit or exceed 10 percent before it starts falling, and that presents some strong headwinds for the markets in coming months.
Louis P. Ingargiola is president of Ingargiola Wealth Management Group in Dunmore. IN THIS CORNER features commentary by guest columnists. Send ideas to jmatthews@ timesshamrock.com.
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