The quarter just ended was the most challenging since 2008. Stock indexes posted their worst quarterly loss in three years, with the S & P 500 index down 13.87% for the quarter and down 8.68% year to date through September 30. Volatility continues in October, and new lows for the year were set on Monday, October 4, before a reversal to the upside. Intraday moves of 3% are occurring with increased frequency.

The gymnastics of market behavior are usually ascribed to the daily news feed of politics, business, and finance. Yet stocks may rally during extremely gloomy times, and other times may plummet for no reason at all. This erratic trading affects investor psychology, turning investors away from stocks.

Yet there are many reasons to remain invested. The dividend yield from many quality companies is now ten times the risk-free rate of short term US Treasuries, an extreme discrepancy. Many U.S. multinational companies are reporting record profits and steady growth. Emerging economies such as China, India, and Russia are creating a large new middle class of consumers. The global economy continues to grow despite challenges on many fronts.

Problems abound, and volatility can churn any investor’s stomach. Increased volatility, by definition, makes stocks riskier. Stocks may be terrific values, but short-term price movements are anyone’s guess. Investors with a short-term time horizon should not be heavily invested in stock. If you are uncomfortable with the level of risk in your investment portfolio, please call me to review and discuss your options.

The economic uncertainty in the U.S. and abroad makes forecasting investment markets nearly impossible. Nonetheless, I venture that many U.S. multinational companies will report terrific earnings for the third quarter, and the stocks will react with a yawn. I believe that the next year and a half will see sideways movement with lots of volatility in equity markets. There continues to be the possibility of another “flash crash” that causes a sharp drop in stock prices, followed by a quick snap back up. On the flip side, it seems that rallies above Dow 12,000 are unsustainable at present.

With the 10-year U.S. Treasury today yielding 2.19% an investment in this safe investment offers little opportunity for long-term growth of capital. Yet safe, liquid investments offering reasonable income yield have become harder to find. Many high yield corporate bonds have been marked down, so opportunities are again showing up in that sector. Opportunities for good yield can also be found in preferred stocks. And California tax-free munis, despised last year, have performed well this year. Economic risk remains relatively high in these sectors, however, and diversification is required to reduce risk.

Consider OKLO. The OKLO Core and Tracker strategies manage volatility while preserving opportunities for growth. You can learn about OKLO and view risk and performance data at:

http://www.oklo-financial.com/introduction.php

The summer of 2011 was traumatic in many ways. My wife underwent surgery to remove a tumor in her brain, but I am happy to report that she has recovered nicely. She continues to receive treatment for metastasized breast cancer, but life has largely returned to normal for both of us. I am working regular office hours and making house calls as needed. I continue to appreciate your kind referrals.

Yours truly,

Paul Drescher, CFP®
Foothill Securities, Inc.
Direct (831) 462-3200