Strong Earnings, Better Economic Numbers, and European Debt Deal- So What Happens Now?

As you have probably noticed, there has been a wave of positive news recently that has driven the markets higher. October has been a wonderful month for investors so far, with just one business day left to go. I have fielded a large number of calls this week from people who would like to know if this rally is going to continue, or if the recent run-up offers an opportunity to sell off some positions.

Unfortunately, answering that question is difficult. Markets are being driven higher by generally strong corporate earnings, a European debt deal that should provide some stability to the region (even if only temporary), and economic numbers that have signaled some improvement. Despite these positives, there is continued weakness in unemployment, gridlock in Washington on a number of items, and concerns about whether companies will be able to sustain strong earnings now that many companies have cut most of the excess costs that they can.

So what should we expect going forward? Retail earnings for the holiday season will be an important indicator to the markets, and could cause further market strength if the meet or exceed expectations, or cause declines if numbers are lower. Any boost in job creation would undoubtedly help the economy, as getting people back to work will boost productivity, spending, and GDP. Markets have historically performed well in the fourth quarter, especially after down third quarters as we had this year. Low interest rates could help boost credit creation and the housing market, which showed some signs of life recently. Conversely, the European debt deal might only offer temporary relief and resurface as a problem in the future. The battle between cutting spending, reducing deficits, and tax policy is sure to be an ongoing battle in Washington, especially in light of the coming election. While corporate earnings have generally been strong this quarter, there have been some high-profile companies that have missed projections as well.

In short, we are probably not out of the woods yet until there is evidence of a longer-term period of stability in the markets and sure signs of a strengthening economy. Still, the market’s positive performance in October is both welcome and noteworthy. It will certainly be more enjoyable for investors to open this month’s statements than the statements from September! As always, it is good to keep your overall investment strategy in mind, rather than making decisions or reacting based on a very strong month of performance, just the same as when there is a very poor month of performance. As we head into the final months of the year, it is a good time to check in with your Wealth Manager or Financial Advisor to review your current strategy and portfolio to best position yourself for 2012.


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