Market Commentary - October 6, 2008

The market downturn continued on Monday as the Dow Jones Industrial Average closed below 10,000 for the first time since October 26, 2004. International stock markets experienced heavy selling as well. London’s FTSE 100 index fell 7.9%, while the CAC 40 in Paris declined 9%. Emerging markets suffered some of the biggest hits, with Russia’s RTS index being halted after it fell more than 20%. This panic selling reminds us not to “throw the baby out with the bathwater.” In other words, quality assets are being sold off along with those that are deteriorating. Many market strategists, despite the current climate of fear and panic selling, are beginning to see good buying opportunities within both fixed income and equities due to declines in valuations.

Within fixed income, some analysts have recently pointed to highly rated municipal, corporate, and variable rate bonds as attractive investment opportunities. Dr. Jerry Webman, Chief Economist for OppenheimerFunds, Inc., recently stated, “As spreads narrow, the opportunities in high grade corporate and municipal bonds look increasingly attractive to investors searching for higher yields and generally sound fundamentals.” For some maturities, munis are yielding more than Treasuries even on a pretax basis, a phenomenon that rarely occurs.

Obviously valuations in the equity markets have also declined significantly. Based on the next twelve months expected earnings, the S&P 500 is now trading at a price-to-earnings ratio of less than twelve¹. While it is true that analysts may have overly optimistic future earnings estimates, many strategists still see compelling value in certain areas of the equity markets. Wally Weitz, President of Wallace R. Weitz & Co, noted that “turmoil in financial markets and emotional selling can take prices to levels well-below the intrinsic values of the underlying businesses.” Active managers can often take advantage of such “emotional selling” to position portfolios for an eventual upturn in the markets. Even though it’s discomforting to witness the current corrective cycle, as prices decline the universe of opportunities for investors’ increases in both fixed income and equities as valuations become more attractive.

1. Wall Street Journal, 10/06/08

The views are those of Cameron Lavey, Senior Investment Analyst, Research Department, ING Advisors Network, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Investors cannot invest directly in indices. Please consult your financial advisor for more information.

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