A broad mix of factors affected the U.S. financial markets in the third quarter of 2007. The Federal Reserve Board lowered interest rates on September 18, and the 0.5% cut was larger than expected. The Board’s action was intended to help forestall some of the adverse effects of the tightening liquidity conditions and deteriorating housing market on the broader economy.
Crude oil prices spiked to record highs, and dismal housing data, slowing job creation and the credit crunch caused the profit outlook to be revised downward for the remainder of 2007. Despite these negative factors, operating earnings finished the third quarter up nearly 10%, once again outpacing Wall Street expectations and continuing one of the most robust profit cycles of the post-war period.
The strong investor appetite for riskier and more exotic credit products that had dominated in previous years abruptly reversed in July and August. Losses in the subprime market provoked a widespread exodus from riskier securities as investors embraced safer Treasury bonds in a classic “flight to quality.” In addition, several inflation indicators moved upward and the dollar weakened.
The energy and information technology sectors lead third quarter performance; of the ten U.S. equity market sectors, eight posted positive returns.
In a break with history, U.S. stocks for the first time have became significantly less expensive (via price-to-earnings, or P/E, ratios) over the course of an extended bull market. Contrast this to the period from 1962 through the year 2000 – a period featuring nine bull markets – when stocks became more expensive as each of those bull markets progressed. As of August 31, 2007, large-cap stocks were the least expensive U.S. market-cap size on a P/E basis.
As always, we at World Trend Financial remain committed to allocating your portfolio in a manner that will limit your losses if markets falter while still providing the potential for gains if markets continue their positive momentum.
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