Brad Kasper, President and Chief Investment Officer

Major stock market indices were down 4-5% yesterday as investors move into panic mode.  There is no single piece of news driving the sell-off; rather the market seems to be gathering downward momentum on its own.  Selling is creating more selling.

The recent selloff is reminiscent of 2008 and 2009 where the markets are hanging on every bit of data that transpires creating large daily market swings.  To give you a few quick facts about yesterdays move:

• The last time we were down more than 400 point on the Dow in a single day was back on December 4, 2008.
• Yesterday was the 14th worst single day point decline in the history of the S&P 500.
• Of the 500 stocks in the S&P 500 only 5 were positive at the end of the day.

The article yesterday spoke about the markets pricing in what was expected to be a poor US unemployment number that was released today (fairly flat number that created an early morning surge in stocks).  Although the fear of a weak unemployment number was the primary domestic economic concern yesterday it is only one of many concerns causing investors to take cover.  Again, investors are being forced with the realization that this economy is moving to a slow growth trend and the idea that political or Fed intervention is going to be a solution is going to the wayside.

We have been talking about our concern of QEI and QEII for the last couple of years now.  These are not long term economic solutions these are ideas to bail water out of a sinking boat quickly but until we address the real problem we will continue to take on water.  The strong bull surge over the last couple of years have been a mystery to a lot of investors that have been watching the technicals and wondering if this is a sound economic recovery or the results of artificial stimulation.  Once again we are faced with a questionable market environment asking ourselves can this economy stand on its own to feet.  A question that unfortunately only time will tell.  However, if we examine the amount of cash that is being held by corporation, banks, and individuals we can conclude that there are still a lot of folks that are protecting against a rainy day.  Moving forward we can expect to see the markets remain sensitive to domestic economic data and could continue to experience large daily swings.  Most likely this will not come in the sever form of a move like yesterday but the potential for continued volatility in intraday trading is high.

On top of the domestic issues that we are dealing with another concern that can also explain the decline: European debt problems, specifically Italy.  It is clear that hot money is moving as investors worry about money market funds and bank solvency.  The euro is falling, European bond yields are rising, US Treasury yields are plummeting and gold is up.  Italy says that it does not face imminent default, but the market acts as if it may.

European countries have spent themselves into a corner, but correcting this mistake will be good for long-term growth, not bad.  While some financial institutions may take losses, government debt itself is water under the bridge.  It’s a sunk cost.  As a result, it has little effect on the economy unless losses create financial contagion.  With mark-to-market accounting now fixed to allow cash flow to be used to value assets, the odds of contagion are minimized and the cost of immunizing America from contagion would be small when compared to 2008.

Portfolio moves for yesterday (August 4, 2011):

Capital Preservation Plus – (1.08%) – 17% of the S&P 500 correction

Income Plus – (-1.31%) – 27% of the S&P 500 correction

Conservative Growth – (1.56%) – 32% of the S&P 500 correction

Moderate Growth – (1.78%) – 37% of the S&P 500 correction

Growth – (1.95%) – 40% of the S&P 500 correction

Growth Plus – (2.25%) – 47% of the S&P 500 correction

Aggressive Growth – (-2.74%) – 57% of the S&P 500 correction

Bear Market Entry – (1.08%) – 22% of the S&P 500 correction

S&P 500 – (4.75)

Dow – (4.33)

Nasdaq – (5.04)

These are a few of the issues that need to be addressed if markets are to regain and maintain their composure. This will require much better economic policies in both America and Europe.

We should not underestimate the markets’ ability to recover if, for once, policymakers were to surprise on the upside. After all, there is lots of cash on the sidelines and most large companies (particularly multinationals) have impressive rock-solid balance sheets.