November 12, 2011

Schwab Market Perspective: Great Expectations

By Liz Ann Sonders, Brad Sorensen, and Michelle Gibley

Stocks often trade on the expectations of investors about the future. As a result, opportunities can potentially be found for those investors that recognize the chances of expectations being exceeded. But despite an October equity rally that resulted from better domestic economic numbers and lessening recession risk, sentiment remains depressed. Judging from consumer surveys, the American public has low confidence in the economy and politicians globally, notably here and in Europe.

Risks are aplenty, but successful investing involves looking at the possibilities that the rest of the market may not be seeing. October was a great example, with those investors who recognized the possibility that the US economy was not about to enter a recession and maintained their target equity exposure being rewarded. Of course, the rally came immediately following a tough correction through August and September; and since the end of October, stocks have suffered anew. Volatility is unlikely to wane soon, and we do believe the trading range environment will continue; but with an upward bias. Diversification and rebalancing remain key in this type of environment vs. trying to time each swing precisely.

Key Points

  * Despite an October rally that saw the best monthly gains for the S&P since 1991, investor sentiment remains depressed. Expectations for future growth and the solving of crisis situation still seem quite low, which provides the opportunity for positive surprises.
  * The Federal Reserve continues to try to solve the unemployment problem but their toolbox may be bereft of tools. Meanwhile, we are entering a politically important period in the United States as the deadline for the “Supercommittee” comes later in the month.
  * The eurozone debt crisis continues to plague the market, with Italy now under significant pressure, while there appears to be no consensus on how to best address the crisis.

Link: http://www.schwab.com/public/schwab/resource_center/expert_insight/todays_market/recent_commentary/schwab_market_perspective.html