'There Aren't Many Places to Hide' for Investors

BOSTON (TheStreet) -- There's nowhere for investors to hide.

The fourth-quarter kickoff yesterday saw the S&P 500 Index slip below 1,100 to a one-year low, while oil and commodities extended their declines in a sign global economies may be headed toward a recession.

And in the third quarter, which ended Friday, 45 of 46 countries' stock indices posted declines, and U.S. stocks had their worst quarter in three years. More importantly, many of the issues that prompted those miserable performances remain unresolved, which bodes poorly for the stock market for the rest of the year.

What analysts and investment advisers are eagerly awaiting, as companies begin reporting third-quarter results in the coming weeks, is fourth-quarter earnings guidance and a peek into 2012. Third-quarter revenue and profits are expected to come in strong, as they have been, but with slower growth. S&P 500 member companies reported record profits in the second quarter.

The concerns are that the tumultuous events of the third quarter will bleed into fourth-quarter earnings and beyond, limiting business and equipment expenditures and hiring into next year. If that's the case, expect stocks to sink further.

The two main worries now are that the Eurozone will slip into an economic abyss because of sovereign-debt crises in weaker member nations and their impact on banking, while on the home front, a rudderless government is raising fears of a double-dip recession.

Greece warned Sunday that it won't meet deficit-reduction targets, throttling world stock markets for the umpteenth time. That raises the odds the country will fail to get new loans to avoid default.

"Greece is almost certain to default, probably sooner rather than later, which, depending on how it's handled, could precipitate contagion to other countries of the periphery (Portugal, Ireland, Italy and Spain) and put European banks under severe stress," said Jerry Webman, a senior investment officer and chief economist at Oppenheimer Funds, in a market commentary.

September's meltdown sent investors heading for the exits, as global markets fell 10.1%, their worst monthly performance since plunging 20.6% in October 2008, S&P Indices reported. The 7.2% loss of the S&P 500 was the worst month for the index since May 2010, as only 54 stocks had gains, while a staggering 218 lost at least a fifth of their value.

That capped a calamitous quarter for investors. No diversified U.S. mutual funds posted a gain in the period, and only a handful of sector funds made money. The average loss for the quarter, out of 9,402 mutual funds tracked by Morningstar, was 17.8%. Funds also fell for the full year as well as the past 12 months.

Howard Silverblatt, a senior index analyst at S&P Indices, told TheStreet that the outlook over the next two weeks is for extreme volatility in the markets worldwide as the situation in Greece reaches a conclusion of either a refinancing of its debt and likely some market recovery or a default, with resulting negative repercussions.

But market gyrations are likely to continue even after that because there are so many uncertainties facing investors, Silverblatt said. "The uncertainty is the killer. In 2008 liquidity was the issue. What have now is a whole host of items, including the political situation," he said.

"We don't know what will happen in 2012," a presidential election year, while Congress has yet to pass a budget and is balking at funding President Obama's proposed $447 billion stimulus plan, he said.

"As a result, people are looking for a place to hide, rather than looking for opportunity," said Webman, a former mutual fund manager, in an interview. "We've seen this before. It's not just disenchantment with a segment of the stock market or a cycle, but the idea that you won't be well-rewarded for investing in equities."

Unlike other economic crises 20 or 30 years ago, "everything is connected" now, Silverblatt said, noting that about 14% of the sales of S&P 500 companies come from Europe.

Silverblatt said there is no market sector, even commodities, that's not suffering. "There aren't many places to hide," he said. "Some folks are saying that this is a buying opportunity, but that's a lot to swallow."

An alternative may be stocks with high dividend yields, but only for those with an investing horizon of "years, if not decades."

One of the gravest concerns is that investors have had it with stocks and won't return to the market even when the current crises are resolved, Silverblatt said.

Webman said investors ought to look past the dire news that seems to change perspectives daily. "It makes people think they need to do something and they don't necessarily have to," he said.

A focus on investment fundamentals, such as steady cash flow and growing dividends, will eventually pay off for long-term investors, Webman said.

Treasuries, which have rallied this year, should be off-limits, Webman said. "My view is that it's risky to hold a large portion (of your portfolio) in U.S. Treasuries right now," given their paltry returns and the prospect of more of the same.

Peter Tuz, president and portfolio manager at Chase Investment Counsel of Charlottesville, Va., which manages $1.5 billion in assets with a big exposure to equities, said his firm has been moving into defensive stocks. Those include consumer staples in the retail industry, and that strategy is likely to continue until the economy shows signs of stability, he said.

"Consumers didn't stop spending in the third quarter, at least as much as many investors thought, but they have been trading down," Tuz said.

He cited discount retailers such as Costco Wholesale ( COST), Dollar Tree Stores ( DLTR), Ross Stores ( ROST) and TJX Cos. ( TJX) as displaying potential.

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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