After surprising third quarter, investors still watching their step

By Sonja Ryst
Special to The Washington Post
Saturday, October 9, 2010; 5:22 PM

Woo-boy, did that thing ever turn around.

Remember the slog of August? Punishing heat. Lousy returns. A limp recovery. The Standard & Poor's 500-stock index ended the month down 5.9 percent for the year.

Just four weeks later, the broadest measure of U.S. stocks had rallied to end the third quarter up 2.3 percent for 2010.

After getting dragged low by the markets in the recession, investors may not care as much about the why as they do about the what: losses swinging to gains.

Since her portfolio lost more than $80,000 in 2007, Sue Patterson has dreaded opening her investment statements. The Defense Department retiree would put off reading them for a week. When she saw in July that her portfolio fell by almost 30 percent, she worried that the market might be tanking again. But she didn't sell; she stuck to her guns.

That decision paid off in light the remarkable rebound. Now Patterson can hardly wait for her statement to arrive in the mail.

"I'm praying that for September, it's gone up," said Patterson, 58. According to her back-of-the-envelope calculation, she might even be able to swing a 4 percent profit on her investments this year. "I lost a lot," she said, "but I'm getting it back."

Experts differ about why stocks climbed so dramatically during the third quarter. Some said investors were buying in anticipation of election results. Others said the market thinks the Federal Reserve will bolster the economy by keeping rates low and buying hundreds of billions of dollars in bonds.

Bond rates are so low that they're comparable to dividends on some stocks. For example, rates on 10-year Treasury bonds have been hovering near all-time lows - close to 2.5 percent last week, according to Meanwhile, stock in Johnson & Johnson paid out a 2.16 percent dividend.

"So many factors have impacted the market, that's probably the biggest surprise to everyone," said Mark Coffelt, portfolio manager at Empiric Funds. Normally when investors look for cheap companies with good earnings, they do well - but not necessarily during the third quarter. "Investors and managers are struggling to get their footing," Coffelt said.

For many investors, the three months that ended Sept. 30 were about overcoming fears of a double-dip recession.

The widely watched S&P 500 rose 10.7 percent in the quarter to 1141.20. In September alone, it surged 8.8 percent, its biggest monthly increase in decades. That followed a harrowing second quarter in which the index plunged 11.9 percent.

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