-Angus Rigby is CEO of TD Waterhouse. The opinions expressed are his own.-

Volatility has been the name of the game since Lehman’s collapse, an event which sent shock waves through the global financial markets. The ripple effect on correlated sectors sent share prices on a roller coaster ride of unpredictable fluctuations throughout the year – and yet at the same time this very volatility paved the way for the profit-taking retail trader, if they got their timing right of course.

Volatility, a dirty word for the long term investor, has been the fuel driving traders who successfully shorted on peaks and bought on lows. Even the Bank of England cutting rates by 1.5 percent to 3 – the biggest single cut since 1992 – failed to slow down individual traders. In fact, in many ways, this has been The Year of the Retail Investor.

Things didn’t look too rosy to begin with though. According to a survey we conducted last December to track investor sentiment, confidence in the financial services sector had dropped significantly. It only ranked at 16th place in the list of sectors expected to perform best this year, a sharp contrast from its coveted 2nd position in the same list in 2007.
However, judging from stats that track our customers’ most popular trades, banks have been “Flavour of the Year” this year - accounting for 69 percent of our overall top ten trades.

Banks have always been popular, but they reached new heights in the aftermath of “Black Monday” in September 2008, with Lloyds and RBS the most traded stocks by volume. These two banking giants have accounted for 21 percent of our overall top ten trades in a rocky year of mergers, rescues, rights issues and redundancies.

Barclays, which narrowly escaped a government bailout thanks to a last-minute cash injection from its middle eastern investor, followed closely behind Lloyds and RBS in popularity, holding a fifth (20 percent) of the top ten trades in a year which saw its share price soar more than 500 percent - a good opportunity to profit with a well timed trade.

Overall, our customers’ trading stats reveal that this was a year for buying; with the volume of top ten buys 60 percent higher than the sells. With market volatility since Lehman setting a fast pace traders needed to keep a watchful eye if they were to act on the peaks and troughs, not only in the UK but in other markets too. Many of our customers also cast their gaze across the pond for opportunities with the volume of international trades up 30 percent in the first six months of the year.

Yet, like a domino effect, other industries soon fell victim to the financial crisis. As mortgages dried up, the housing market almost ground to a halt – prompting traders to scoop up cut-price shares in housing developers.

Meanwhile, when the price of oil dropped below $50 a barrel, it caused a further stir among investors and trading in the mining sector accounted for 14% of trading activity over the past year – second only to the banking sector.

But while the economic downturn has taken its toll on many businesses it has also cleared the path for many merger and acquisition opportunities – further fuelling stock market activity. Trading activity for the month after Lehman’s reached a yearly high as speculation for a Lloyds TSB takeover of HBOS was rife.

So now, a year on from Lehman’s it remains to be seen if there really are signs of an economic recovery. The FTSE 100 breaching the 5,000 mark on September 11 is a good start, but it will be the retail investment strategy over the coming months that will be the real indicator of whether stability is here to stay, or just a passing visitor.

-David Kuo, Director at the financial website The Motley Fool. The opinions expressed are his own.-

It wasn’t supposed to happen. Shares were not supposed to rise between May and September. That is if you believe the old stock market adage that says you should sell in May and go away, and don’t come back until St Legers Day.

However, if you had heeded the advice this year, you would have missed a 13 percent jump in shares during the summer months. Other great times to have ignored the adage were in 1987, 1997 and 2005 when shares jumped 15 percent, 18 percent and 14 percent.

But before we dismiss the adage entirely, there appears to be some grain of truth to the quaint saying that has its roots in London’s sewers rather than London’s financial district.

The five months from May to September have not been rewarding for private investors in twelve out of the last 25 years. By following the advice, investors would have sidestepped the severe stock market falls of 2008, 2002, and 2001, when shares fell 19.5 percent, 28 percent and 17.8 percent respectively.

Additionally, selling your shares in May 1998 would have protected your portfolio from the collapse of Long Term Capital Management, which saw shares crumble almost 15 percent during the five summer months.

Selling your shares this year would not have been clever, though. The London market has climbed 13 percent between May and the start of September. The summer surge accounted for almost all of the stock market gains to date this year.

Of course, if you stare hard enough at any set of data a pattern will eventually emerge. It may not mean anything useful, but it is a pattern nonetheless.

On the face of it, the summer months do not appear to be the best time to hold shares. The London stock market has risen around 8 percent a year between 1984 and 2008. By comparison, shares have fallen around 0.7 percent during the summer months of May through to September. Therefore, selling in May and buying back in September could be marginally beneficial.

However, it is important to consider other factors before you liquidate your portfolio at the start of every summer. It is essential to take into account selling and buying costs of around 3 percent of your portfolio value. Then there is Capital Gains Tax to pay if your gains exceed the current allowance of 9,600 pounds. And don’t forget you will have to forgo your dividends too.

So where next for shares? Should we liquidate our portfolios and lock in the gains for this year?
Truth is shares were ostensibly cheap following the sell-off in 2007. Consequently, the rebound was not unexpected even if it did happen in the summer of 2008. However, the speed and magnitude of the recovery did take many by surprise. And now that the low-hanging fruits have been plucked, peeled and baked into a pie the next stage will be more tricky.

The economic recovery, which is likely to take years, could be slow and anaemic. High levels of corporate failures will be a key feature as undercapitalised and highly indebted businesses find it increasingly difficult to secure finance. Consumer spending will remain subdued as shoppers keep their spending belts tightened. The upshot is a torrid time for many businesses.

The trick for investors now is to find companies with strong balance sheets and manageable debt that will benefit from any economic recovery. These companies do exists and their growth should spur the next stage of the stock market recovery, which may not occur overnight, but will happen over time.

Don't blame global stock markets for being skittish. It is August, after all, a month that has spelled trouble in the past two years.

Recall that, a year ago, Fannie Mae and Freddie Mac started wobbling at the precipice while AIG, desperate for cash, began paying junk-like yields in the corporate bond market. A month later, all hell broke loose.

In August 2007, a shutdown in short-term lending markets forced global policy makers to rush in with a flood of liquidity to keep the lifeblood of the financial system from clotting.

So it's only natural that, this year, sellers are trigger-happy at the slightest whiff of trouble.

Problems surfaced in the United States last week, when a double-whammy of soft retail sales followed by a drop in consumer sentiment reignited worries that for all the good cheer about an emerging recovery, the exhausted American shopper is still unfit to carry the economy.

These concerns carried over into Monday trading in Asia, where they mingled with homegrown worries. In China, a drop-off in direct foreign investment helped fuel a nearly 6 percent decline in the Shanghai stock index and concerns about the Japanese economy helped trim more than 3 percent from the Nikkei.

U.S. stock indices have followed suit, with the S&P 500 off 2.43 percent and the Dow Jones Industrial Average off 2 percent.

Monday was an ugly day, but investors should try to rein in their anxiety about what it means for such big-picture questions as what shape the economic recovery will take. That's because a battle between bulls and bears, which typically emerges at economic turning points, has taken hold of financial markets -- meaning today's worries about the global economy are likely to morph into tomorrow's worries about too much stimulus creating dangerous asset bubbles.

It's a constant tension and one that will continue to push and pull financial markets for some time to come.

"The markets have very selectively reacted to economic data," says Stephen Stanley, chief economist at RBS. Little more than a week ago, for example, the S&P 500 hit a 10-month high after the U.S. reported "only" 247,000 workers were dropped from payrolls in July.

Given the big run up in risky assets like stocks and corporate debt since March, and last week's data, it's not surprising that investors are now worried that the rosier outlooks failed to take into account the growing fixation of the U.S. consumer on savings.

Take price-earnings ratios. Bespoke Investment Group noted last week that the P/E ratio of companies in the S&P 500 climbed to its highest peak since 2004, as earnings failed to keep pace with the optimism that fueled a 50 percent jump in the S&P 500 stock index since March. For earnings to catch up, the consumer will have to shake off worries about high unemployment rates and pitch in with good old-fashioned shopping. So far, that's looking like a stretch.

So, chalk up the stock declines to correcting what had become overbought conditions and get ready for more choppiness ahead.

This is the messy reality of turning points, not necessarily the foreshadowing of something truly ugly to come. Even if it is August.

- Brendan Wood is Chairman of Brendan Wood International, a global intelligence advisory firm. Recently, BWI published the World’s TopGun CEOs as ranked by 2500 institutional investors, which provides insight into the executives in whom shareholders feel the greatest confidence. The opinions expressed are his own. -

The Brendan Wood International’s panel of 2500 institutional investors suffered through last year’s markets believing value would somehow prevail. Those value investing “diehards” indeed died hard.

Conversely, those who correctly read the status of shareholder confidence and acted on it were spared. In short, shareholders that had lost confidence in the system abandoned their value criteria and sold good companies along with lesser ones.

As a result, “value” investors were left holding a bag full of stocks with hidden value. Sadly, the value remained undercover while the price of these stocks plummeted. Many portfolios catapulted through risk tolerance levels and took their investors’ savings along with them. Capital preservation was sacrificed in favor of the mantra “the market always comes back.”

But as advocates of Shareholder Confidence, we ask why take that ride and lose the most important strengths an investor has, namely, capital and a willingness to assume reasonable risk?

If half your life savings or more was lost, what capital or willingness to assume further risk would you have? Shareholder confidence trumps hidden value. If value in a company is credible to those holding the stock, the price will at least remain stable, if not indeed rise.

Should this not be the case, one may be stuck owning the most costly secret in town. This may be so because value investing relies on shareholder confidence coming to the forefront.

ON THE CONTRARY!

A majority of investors classify themselves as contrarians. Surprisingly, they agree with one another about 70 percent of the time. This raises two obvious questions. What is the benefit of contrarianism? Why is it considered a quality? If the majority of investors disagree with you (or you with them), the future of a portfolio relies upon them changing their minds. How much success can an investor expect via changing other people’s minds? Are contrarians delusional about being contrarians? It appears so. Like it or not, the success of contrarians depends on consensus, that is, other contrarians agreeing with them. BWI may have thus uncovered the “quiet contrarian majority”.

SHAREHOLDER CONFIDENCE AND THE CURRENT MARKET

Prior to the 2008 downturn, the number of companies at the top of the Shareholder Confidence Index approached 33 percent. Since the dramatic weakening of markets, that number has been running at 17-18 percent. With no change in the recent quarter, investors remain wary and are not yet ready to assert top levels of confidence (i.e. buying behavior) except in the Top 18 percent.

If investors were to follow the example of Brendan Wood International’s panel, they would only be buying the best of the best.

- Christopher Traulsen is director of fund research at Morningstar Europe. The opinions expressed are his own. -

Star global manager Dennis Stattman of BlackRock opened the Morningstar Investment Conference in London today with a clear-eyed take on the outlook for the global markets.

Stattman noted that stock investing has not compensated investors for the risks involved for a very long period now, lagging a 10-year U.S. Treasury constant maturity return over the past 30 years.

He argued persuasively that valuations are now to the point that stocks are likely to outperform bonds going forward, but his view was very far from rosy. Indeed, Stattman made the case that a V-shaped recovery for large developed economies isn’t in the cards, stating flatly that the recovery in developed markets would be very weak by historical standards and that the recovery in the U.S. would be “shallow, intermittent, and disappointing.”

So just why did Stattman sound such a pessimistic note, and did he see other reasons for optimism? The answer to the first question is straightforward–the crux of the matter in Stattman’s view is that U.S. authorities are treating the wrong problem. Using a Keynesian demand-stimulus approach, they are trying to re-inflate consumer demand by injecting massive amounts of liquidity into the system.

However, Stattman showed figures on U.S. home and auto ownership, among others, that suggest there isn’t much scope for demand to increase materially and describe demand for both cars and houses as “saturated”. Instead, Stattman thinks policymakers should focus on increasing savings and rewarding consumers for forgoing consumption today.

But all is not lost: In contrast to the satiated consumer appetites of the larger developed economies, Stattman noted that China suffers from too much saving and too little domestic demand. Another way of putting it is that the U.S. standard of living is very high, whilst that of China is much lower.

But this is unlikely to remain the case: He cited the fact that demand for motor vehicles in China has surpassed that of the U.S. in each of the past three months as en enormously important data point that is not being paid enough attention. The implication is that if world demand is to grow, China and other emerging markets will drive it, not the large developed economies.