Monday, October 23, 2006

News - October 2006

Welcome to Rollins Financial Counseling. We hope our new website will be a way for us to communicate with our clients and provide you with information and market updates on a regular basis as a supplement to our quarterly financial newsletter, The Rollins Report.

The purpose of the “News” page is to provide you with some commentary and thoughts that are of common interest among investors. The first subject we would like to address is the recent rally of the Dow 30 Industrials to record levels passing the 12,000 milestone for the first time in history. Although the Dow tracks only thirty stocks, it continues to be the most widely followed index and provides a general reflection of the U.S. stock market.

The performances by the Dow and large cap stocks have been quite good recently, with the Dow returning over 13% year-to-date (at the time of this writing). The recent record-setting Dow performance has led to some investors becoming more cautious, reasoning that the market is due for a correction. We believe that many investors have turned skeptical about the market because the last time the Dow was at record highs in January of 2000, the market corrected significantly in the months following. There are, however, noteworthy differences between this market and the market leading up to the year 2000.

The clear difference between the market levels of today and the early 2000’s is the price relative to earnings ratio (P/E ratio). In the early 2000’s, the S&P 500 index was trading over 30 and 40 times earnings compared to 17 times earnings today, with the historical average around 15 times earnings. With corporate profits at all-time highs, an informed investor may actually expect all indexes to be trading at all-time highs. The S&P 500 index at current levels is still about 12% below its all-time high set in 2000. While current price levels are not necessarily a reason not to expect a correction, it is a significantly different scenario than the most recent correction from 2000 through 2002.

Another common theme for caution among our clients is concern about the markets in the face of a possible change in control of Congress from the Republicans to the Democrats. Most polls are indicating that the House of Representatives will most likely change hands while the Senate will probably remain in Republican control. The markets have moved up to record levels even as the chances increase of Democratic success in the midterm elections. This market reaction, which is usually predictive of impending challenges, seems to dispute concern among investors and Wall Street that renewed Democratic influence in Congress would be an absolute negative for equity prices. Of course, during the 1980’s and 1990’s the market performance was stellar, which may suggest that the market can do well regardless of which party is in control of the White House or Congress.

This is not a prognostication for higher stock market prices, as humans do not have a great record making such predictions. These facts and observations may indicate that there is not as much risk investing in the current stock market as some may perceive. There are always risks to the economy and the stock market, which is why we expect higher returns from these investments. The stock market has historically rewarded those investors willing to accept that risk with returns that have eclipsed most other asset classes over long time periods.

Thank you for visiting Our objective when building this website was to offer convenient account access and provide relevant information while still maintaining a personal relationship with our clients. We look forward to receiving your feedback.

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