Mixed Outlook for Equities

Feeling bullish on the last trimester--Searching for Alpha, the monthly index newsletter

Investors are facing numerous crosscurrents as they try to parse the direction of the market for the balance of 2008. When all's said and done, I tip my hat to the bulls for the last four months of the year.

On the inflation front, the slowdown in global economic growth has finally hampered the rise in raw materials. Crude oil has fallen precipitously in the last few months, which has proven to be a boon for airline stocks and other big users of energy. As speculators continue to back away from energies, prices should continue dropping, which should take considerable pressure off domestic equities.

Look to the Fed to take advantage of the lower prices. With less inflation expectations, Treasuries now have a much more attractive real yield. And there is less pressure to raise rates, as energy and other commodities fall in price.

The upcoming election is another source of angst. It seems that the race to the presidency will be closer than anyone expected. Most view a political change as a positive. I expect Obama's economic agenda to drift in a more centrist direction. No one wants to step into the Oval Office with bigger problems than we already have.

Woes in the housing markets will be tougher to solve. Recent interest in the debt of Fannie Mae (FNM) and Freddie Mac (FRE) are signs that mortgage securities shouldn't be completely written off, but there is considerable inventory issues in some of the largest housing markets. I see these problems ebbing, but not disappearing, for another year.

The outlook for earnings is likewise mixed. But expectations are so low at present that I see room for the market to rally even as corporate bottom lines struggle with less demand and increased margin pressure. Bottom line--I see higher equity prices by year-end.

The Monthly Index Report for September 2008

Index

Aug-08

QTD

YTD

Description
S&P 500 Index*

1.2%

0.2% -12.6% Large-cap stocks
DJIA*

1.5%

1.7%

-13.0%

Large-cap stocks
Nasdaq Comp.*

1.8%

3.3%

-10.7%

Large-cap tech stocks
Russell 1000 Growth

1.1%

-0.8%

-9.8%

Large-cap growth stocks
Russell 1000 Value 1.7% 1.3%

-12.4%

Large-cap value stocks
Russell 2000 Growth

2.5%

4.9%

-4.5%

Small-cap growth stocks
Russell 2000 Value

4.8%

10.1%

-0.7%

Small-cap value stocks
EAFE

-4.0%

-7.1%

-16.9%

Europe, Australasia & Far East Index
Lehman Aggregate 1.0%

0.9%

2.0%

U.S. Government Bonds
Lehman High Yield

0.4%

-1.0%

-2.3%

High Yield Corporate Bonds
Calyon Financial Barclay Index**

-1.7%

-4.3% 3.6% Managed Futures
3-mo. Treasury Bill*** 0.5% 0.7%

1.8%

All returns are estimates as of August 29, 2008. *Return numbers do not include dividends.

** Returns are estimates as of August 28, 2008.

Chad Leavitt is the director of alternative assets for Memphis-based Sovereign Wealth Management. He can be reached at chad@sovereignwealth.com.

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