advertisement
Stocks and, especially, commodities took a beating in the third quarter, and the MSN Money Model ETF Portfolio suffered its biggest decline since inception nearly five years ago, plunging 13.1%.
The bear market for stocks reached new lows during the period, and damage elsewhere in the world was even worse. Every stock holding declined by double digits, and losses soared to the 25% range in emerging markets. Bonds rallied, but other alternatives did not. Commercial real estate slipped marginally, and energy prices were slashed by a quarter.
The road ahead looks just as dicey, but we're trapped. It's too late to flee to safety and too early to know where to go next. So I'll stand pat for the fourth quarter.
As the third quarter ended, federal authorities were crafting a debt-rescue plan designed to buoy investors, but the market remained discouraged by broadening economic weakness, rising unemployment and near gridlock in debt markets.
And on Monday, the latest version of that rescue plan was voted down in the House of Representatives, tossing the process again into limbo and sending stocks deeper into the red. The Dow Jones industrials ($INDU) closed down 778 points on the day. The credit markets seem at a standstill.
In the Sept. 25 New York Times, bond king William H. Gross of Pimco revealed he had been offered -- and turned down -- the opportunity to lend money to Morgan Stanley (MS, news, msgs) at 25% interest for six months.
"That's where the fear builds in and makes for totally illiquid markets," he explained. "Where no one trusts anybody, no one trusts any price."
With global markets so unsettled, many investors have been rushing for the exits. Several huge daily declines toward the end of the quarter took place amid extraordinarily heavy turnover, signaling the kind of panic that could signify what is called capitulation -- the final climax of selling that marks the end of a bear market.
More from MSN Money
But it's equally possible these declines marked only more dismal steps downward toward an even worse future. Stocks don't turn up until they sense better times ahead, and growing numbers of economists are predicting the current downturn will worsen and extend through all of 2009, even if the debt-rescue plan succeeds.
The model exchange-traded-fund portfolio is already somewhat defensive in its posture, with nearly a quarter of assets in cash and bonds, and the bulk of the equity holdings in growth stocks, as opposed to economically sensitive value stocks.
It seems prudent to keep our heads down and sit tight. I trade in this portfolio only at the end of each quarter, and things are just too unsettled right now. So I won't make any changes as we enter the final quarter of the year.
Protection in real estate?
I did one thing right, sort of, three months ago when I took $5,000 in profits from the energy sector and redeployed them into real estate. iShares S&P North American Natural Resources (IGE, news, msgs) has tumbled 25.2% since then, while iShares Cohen & Steers Realty Majors (ICF, news, msgs) has slipped only 1.3%.(For production reasons, third-quarter results reflect the period June 19 through Sept. 26. Also, the natural-resources ETF split 3-for-1 in July.)
- Video: Mutual funds or ETFs?
The correction in oil prices that I was expecting occurred but went even further, reflecting rapidly deteriorating global demand. In ordinary circumstances, I would take advantage of these lower prices to rebuild this position. I think natural resources remain in a long-term bull market, because global standards of living are on the rise and resources are the literal fuel of this expansion.
Take the poll
Sound off about how the current financial crisis is affecting you and your money decisions. Click here to go to the MSN Money poll.
What's more, the major integrated oil companies -- ExxonMobil (XOM, news, msgs), Chevron (CVX, news, msgs) and ConocoPhillips (COP, news, msgs) -- are the top holdings of our resources ETF, accounting for 23% of its assets, and they are the ones best-positioned to benefit from future demand.
"Even if you pull back the commodity, the outlook in terms of results is still very favorable," says Sheraz Mian, a senior equity analyst for Zacks Investment Research. "They have excellent balance sheets, and they're extremely disciplined in how they spend their money. . . . They are regularly paying out excess cash to shareholders in the shape of growing dividends and fairly aggressive stock buybacks."
Continued: Circumstances are far from ordinary
Rate this Article
High