INVESTMENT NEWSLETTER
October 2009

Seven Month Surge

The powerful rally continued into September capping a strong quarterly advance. For the second consecutive quarter, stocks of all types soared. Small-caps led in the third quarter with the Russell 2000 up 19% compared to gains of nearly 16% for the large-cap S&P 500, DJIA, and the more tech-oriented Nasdaq Composite.

After the best back-to-back quarterly gains since 1987, major indices are up 50% from their March lows, yet remain 30% below their all-time highs in October 2007. Past 12-month returns are starting to turn positive though, as most of the top performing funds have tremendous gains for the past one-, three- and six-months.

The powerful rally off the 12-year lows in March was widespread. Investors everywhere are putting their cash to work. Global stock markets posted their best quarter in 20 years with the Dow Jones Global Index, excluding the U.S., up 19%. Ned Davis reports that 39 of 42 global market benchmarks have risen at least 15% above their 200 day moving averages. European markets were particularly strong, as well as emerging markets, particularly Latin America.

Foreign fund performance benefited from the dollar's slump. The dollar's losing streak began when stocks started rallying in March, and picked up steam recently. As economies around the world chugged back to life, investors moved into riskier investments in search of higher returns. For the quarter, the dollar lost 4% of its value against the euro and nearly 7% against the Japanese yen. Currencies of major commodity-producing nations soared against the dollar.

But there is always a trade-off. A weak dollar hurts European and Asian exports and eventually policy makers will attempt to keep their exports competitive. Both Asia and Germany, Europe's biggest economy, remain highly dependent on exports for growth.

As investors moved back into riskier investments many of the biggest decliners during the credit crisis posted the largest gains last quarter. Recently financials were the best performing sector followed by industrial materials and consumer discretionary, which includes the much-battered auto industry.

Balance is Key
Even after seven months of big gains, many investors remain understandably cautious. History shows us that stock investors typically earn higher investment returns after periods of sharp losses, but the most extreme drop of our lifetimes has left many investors shell-shocked.

We know that over the long-term stocks have always provided compelling returns. Looking at all the previous 20-year periods to date, the average return from stocks equals the best return that bonds ever produced in any 20-year period. Bonds, for all their ability to buffer a portfolio, have not offered much protection against eroding purchasing power in the long term - for that you need stocks. But the price we pay for higher long-term returns is market volatility, and recent volatility has been so extraordinarily high that many investors have withdrawn. Perfectly understandable, considering two devastating back-to-back bear markets and a negative 10-year total return for stocks.

Thank You for your trust and continued support!

Sincerely,

P. Michael Valley II
Estate Planning Professionals