The College Investor’s Market Thoughts – September 30, 2011

This last week has been another wild one, but it seems to be ending on a higher note.  That is, unless you were holding gold, which is down about 10%.  Instead of my usual weekly chart, I thought I would share a chart of gold prices versus the Dow Jones Industrial Average for the past two years.  It is leveled by percentage.

 

What I find interesting is that gold has climbed right along with the Dow over the past 2 years (and 5 if you pan out that long).  However, you can clearly see the out-performance of gold and the start of a correction occurring.  I wanted to note that in times of inflation, while gold performs well, stocks out-perform gold.  I think this correction in gold will continue, and as inflation creeps back into the economy, we will see a reversal of these two lines.

 

So What Drove The Market This Week?

• European Bailouts: The fears in Europe have been spreading a lot of fear in the markets.  Early in the week, European leaders agreed to continue funding a bailout fund, which would be essential should Greece default.  This assayed a lot of fears in the market and led to some nice gains early in the week.

• GDP Growth & Inflation: The Commerce Department revised GDP growth in the second quarter upward, to 1.3%.  While still considered sluggish growth, that was better than expected.  With that, however, inflation was also adjusted upward to 2.5%.  While the Fed signaled a loose monetary policy until 2013 to spur growth, this number could contradict those plans in the future if it continues to rise.

• Jobs: Jobs were another large driver in the market this week – falling to 391,000, the first time under 400,000 since April.  While this sounds like good news, there was a lot of noise surrounding this number, such as Hurricane Irene, potential calendar shifts, and other issues.  However, the result is still good, and could mean the economy may have a stronger 4th Quarter than expected.

 

The College Investor’s Thoughts:

• Precious Metals: If you’re still in precious metals as a play against inflation, or for speculation, now may be the time to get out if you already haven’t.  I’ve extolled on Not Buying Gold before, but I’m continuing to stand by it.  It is very volatile, and you will get better returns over time with a large-cap dividend paying stock.  Look at those rather than getting caught up in the fervor of gold.

• Look For Overselling: As we may be approaching a good long-term buy-point, you should look for solid companies that pay dividends that may have been oversold as of late.  A simple value stock screen could help you find these companies.  Look for companies that have solid long-term fundamentals and may just be facing a quarter or several quarter slowdown.

• Don’t Get Over-Excited: This could still be a bear market rally, and there have been some that have lasted for several weeks and months.  The overall economic fundamentals are still very mixed.  However, some companies are capitalizing on the economic changes to work in their favor, and these are the companies you should be looking at.

 

Readers, what are your thoughts this week?