Stock Prices

[dan_s]

The Standard & Poor's 500 index declined 4.7% last month, its biggest August loss since 2001. And September historically has been the worst month for stocks, with October in second place. But since 1995, the S&P has declined in August six times, and then it recorded a gain for the rest of the year in each case.

Stocks climbed 5% in the first three trading days of September. This was primarily because (1) the August selling was overdone and (2) various economic reports have eased concerns about a double dip back into recession. Stocks are about even so far this week.

In my view, ongoing worries about the economy and other issues have been largely "discounted" in both the bond and stock markets. As a result, the former is expensive and the latter is cheap. Heavy flight-to-safety buying by anxious investors has pushed yields of higher-quality bonds down to near historic lows.

As I pointed out in the last newsletter, oil prices have been trapped in a $70 - $80 trading range for 12 months with very strong technical support at just above $70/bbl. In my opinion, there is now more chance that oil will move above this range than dip below it. Non-OPEC supply is falling and demand from China and the rest of Asia is going higher. Any sign of economic recovery will drive up oil prices. Once we get past the mid-term elections look for oil to break over $80 and stay there.

Natural gas prices should set the bottom in September. There is still a lot of gas out there and that will not change anytime soon but NG prices will begin to drift higher in October.

Dan