Weekly Markets Commentary – November 17, 2008

David Joy — Chief Market Strategist, RiverSource Investments

Markets Fall, Opportunities Arise

It was another losing week for equity markets around the globe. Every geographic region suffered losses and few individual markets were spared. It was also a week in which both Germany and Japan technically fell into recession, if there was any doubt.

In the United States, volatility once again spiked higher, as the VIX Index ended the week at 66.31, up from 59.98 the prior week. A year ago, as this mess was getting started, the VIX stood at 25.49.

The Dow Jones Industrial Average shed five percent, better than both the S&P 500 Index, which fell 6.2 percent, and the Nasdaq Composite, which lost 7.9 percent. The small cap Russell 2000 Index sank 9.7 percent.

Perhaps the best that can be said is that on Wednesday, when the S&P 500 plunged 5.2 percent, the index still managed to close above both its October 27 closing low and its October 10 intraday low. Stocks did rally sharply the following day, only to give back more than half the gain on Friday. The S&P 500 index now resides approximately three percent above that low close of three weeks ago.

Financials once again led stocks lower with pronounced weakness in life insurers and real estate investment trusts. Other sectors experiencing sharp declines included consumer discretionary (not helped by a weak retail sales report), materials, technology and industrials.

It should come as no surprise that the worst-performing category year-to-date within the Dow Jones Total Market Industry Groups is mortgage finance. The best performing category is brewers. I wonder if there is any correlation.

Aside from the ability of stocks to find support at the October low, the absence of convincing evidence of a market bottom is bothersome. Credit spreads remain at record levels and short-term Treasury yields push ever lower. The trend of advancing versus declining stocks also edges lower. On the NYSE last week only eight stocks made new highs while 749 made new lows. On the Nasdaq, the ratio was 13 to 993.

Despite the downside equity market volatility and the drumbeat of depressing economic news, the dollar index rose to a two and a half year high, and crude oil fell $4.00 a barrel to $57.04, although it traded as low as $54.67.

As a measure of the extraordinary events taking place on what seems to be a daily basis, we hardly seem to notice developments that in other times would be considered seismic. For example, in just the last week alone, American Express received permission to become a bank, Fannie Mae and Freddie Mac reported massive losses and requested capital infusions in the billions, the leaders of the largest economies worldwide gathered to discuss how to fix things, and the $700 billion Troubled Assets Relief Program (TARP) program shifted gears to focus on consumer loans.

Attractive Opportunities

So, with all that going on, ‘what do we do now,’ you ask? In case you missed it, we started buying stocks again two weeks ago. At least half of you are suddenly wondering if we have lost our minds. No, we haven't. At least we don't think so.

What we have done is identified what we believe are attractively valued opportunities in a number of asset categories. In virtually every geographic region, stocks are cheap. Yes, earnings estimates for next year are suspect. But we are not investing for next year alone. With patience, perhaps in 12 months, perhaps longer, we believe we will look back on this time as an attractive opportunity. The same is true in corporate bonds, both investment grade and below investment grade, and in bank loans. It also is true for municipal bonds.

We are proceeding slowly, but we have begun to turn the dial incrementally back toward adding greater risk exposure. We are comforted in our view precisely because volatility remains excessively high, sentiment excessively low, spreads excessively wide and breadth excessively narrow.