Equities were able to retrace over half their losses early in the month to post a large but manageable loss for August (see monthly index numbers below). Momentum seems to be bullish after fears over S&P’s downgrade, and investors are left wondering if markets will continue their winning ways.
Our take is that the market will muddle through the fourth quarter up 3%-4%, ending up with a mid-single digit return for 2011.
There are several reasons for this outlook. Stocks are cheap, with forward P/Es below average. Corporate balance sheets are strong, earnings are growing, and dividend yields are attractive compared to fixed income.