Most of the damage in the quarter happened over a short period between late July and early August. In early July, as Congress engaged in a long debate over the bill that would raise the debt ceiling, the market appeared to be holding up. On closer review, economically sensitive stocks were dropping, but were largely offset by more defensive stocks which were rising. Once a deal was reached, rather than rally because a crisis was averted, the entire market began to selloff. The market hit a short term low shortly after Standard & Poor's downgraded the United States credit rating. The rest of the quarter saw increased volatility with no real direction, up or down. This volatility was a direct reflection of the high level of uncertainty with regard to the strength of the economy and European efforts to suppress a sovereign debt crisis.
The uncertainty in the economic outlook drove many investors to United States Treasury obligations. The United States 10 year notes started the quarter at a 3.1% yield then declined to 1.9% by the end of the quarter. The longer maturities as measured by the 30 year United States Treasury bond had a sharp decline in yield over the quarter from 4.3% to 2.9%.
The Fund suffered from its exposure in industrial stocks which underperformed the market and from having no exposure to the United States Treasury market. The Fund held United States agency debt and corporate bonds. The best performing stocks were Sturm Ruger (RGR) (+18%), Bristol-Myers Squibb (BMY) (+8%), Kimberly-Clark (KMB) (+6%), Target (TGT) (+4%), and Hershey (HSY) (+4%) during the quarter. The worst third quarter performing stocks were Lincoln National (LNC) (-45%), Bank of America (BAC) (-44%), Ingersoll-Rand (IR) (-38%), TCF Financial (TCB) (-33%), and General Motors (GM) (-33%).
After reviewing the preliminary 3rd Quarter GDP report, it appears the recessionary fears so prevalent in the third quarter were unfounded. The inflation-adjusted annual rate of 2.5% from July through September was solid and the strongest performance of the year. The economy exhibited strength as consumers spent more on durable items and businesses invested heavily, particularly on equipment and software. While this solid report is better than had been feared, it is not strong enough to meaningfully address the persistently high unemployment rate.
Now, fast forward to October 27 - worldwide markets are rallying today! The market is reacting to the better than feared GDP numbers mentioned earlier, and it appears the countries in the Eurozone are having some success at crafting a solution to the sovereign debt problem. The Growth Fund, S&P500 Index, and Dow Jones Industrial Average have now all delivered positive results for the year. The rally started as corporations reported 3rd quarter financial results. In very general terms, the results have been good. And just as important, the managers of these companies are not seeing significant signs of weakness in their businesses and are therefore continuing to invest in anticipation of future growth. A little bit of confidence can go a long way for the economy, and the market.
We believe the economy will continue to gradually build on the momentum it has established over the last two and a half years. Areas of strength for the remainder of 2011 and into 2012 will be business investment and exports of capital goods. We believe the U.S. economy will grow at by 2% in 2011.
Housing continues to be a drag on the economy, and we expect that to continue for the rest of the year. It seems likely that housing prices will have found a bottom this year and that a recovery beginning in 2012 will act to extend the overall economic recovery.
The outlook for stock prices remains favorable considering prospects for further above-average earnings growth and reasonable valuation levels. Moreover, we believe investors have considerable liquidity with which to fund further stock purchases.
William B. Frels
President and Lead Manager
Ronald L. Kaliebe
Vice President and Co-Manager