Centara Connection

Market Update

Mark Dossa, CFP®, Senior Portfolio Manager

Is anybody else glad this quarter is over? After hitting an all-time high at 1,553 on July 19th, the S&P 500 entered correction mode and slid over 10% over the next month hitting a closing low of 1,406 on August 15th. The other major indexes followed suit. Like a bouncing ball, stocks moved up and down in wild swings for weeks as investors digested the negative news flowing out of mortgage lenders and hedge funds buying subprime loans.

But like a resilient fighter, investors eventually shrugged off the stream of bad news and chose instead to focus on positive economic reports to boost equity prices higher. In the end, the Federal Reserve came to the rescue in September, dropping interest rates by 50 bps to further boost confidence that all was not lost. Stocks finished the quarter with nice gains as the DJIA rose 3.6%, the S&P 500 moved up 1.6% and the NASDAQ 3.8%. We certainly saw a shift in the market as growth stocks outpaced value in all areas – large, mid and small.

Year-to-date, the S&P (with dividends) is up 9.13% and both the Dow and NASDAQ are up over 10%. These are healthy gains when looking at the crumbling housing market and rising oil prices. Unemployment remains low and consumer spending is still healthy, helping corporate profits remain higher than expected. The dollar continues to lose value, as it is on par with the Canadian dollar for the first time since 1976.

Heading into Q4, historically a good time for equities, we have a number of headwinds to caution our outlook. We will see a major resetting of home loans between now and March 30, 2008. The impact of higher rates is still unknown but could spell trouble for the consumer and economy. Corporate earnings should come in lower than previous quarters, but by how much is a guess at this point. Oil is trading over $80 per barrel possibly leading to higher inflation which would not bode well for the Fed’s further rate cut decisions.

Even considering the above, there is reason to be optimistic. Inflation, interest rates and unemployment are low. International markets are growing steadily helping boost profits for U.S. companies operating overseas. Even though the subprime market is a mess, in reality it makes up a small portion of the overall mortgage business – less than 10%. We continue to believe that equity markets will enjoy a positive return for 2007 and are investing accordingly.

Centara Capital Management Group, Inc.
8880 Rio San Diego Drive, 4th Floor
San Diego, CA 92108
(619) 398-1700
www.centaracapital.com
info@centaracapital.com

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