Marketing Commentary- Q1 2006

What’s Been Happening?

The hangover is finally past. Beware immodest proposals. The vicious US Bear Market finally ran out of steam just over three years ago. In an almost non-stop rebound, virtually all stock market investors look smarter than they are right now. The nearly 800 trading days without a downward correction of 10% or more is not unprecedented, but it is unusual. This won’t go on forever. This is the time when anyone who has been invested in stocks has a pretty good three-year track record and Wall Street marketers are not known for their humility.

Behavioral economics warns us that what is most recent in our memory becomes more likely in our imagination of the future. That is dangerous to our wealth because it is so wrong – the opposite is more likely to be true. Cycles end, leadership rotates.

It is now widely accepted that International investing belongs in every portfolio and Emerging Markets have come of age. Looking backward, India’s growth rate and surging stock markets seem obvious and everyone wants a piece of it. This is the kind of situation in which prices can get bid up too high. Our rebalancing discipline keeps us selling a bit of the winners.

Trends to be Aware of

The yield curve is now essentially flat. This means short-term interest rates are as high as long-term interest rates. The Federal Reserve still controls the shortest-term rates (overnight loans to banks), whereas all other rates vary according to market forces (demand from buyers and sellers of debt instruments). In the past, a flat or declining yield curve has often presaged a slowing economy. Higher interest rates hurt corporate profits. But the Fed also has an interest in raising rates to attract foreign capital (i.e. keep the Chinese and others buying Treasury Bonds) as well holding up the price of the dollar. These opposing realities may end up just being a wash this round.

What To Expect From Here

We are obviously off to a great start in 2006, and we’re grateful for what we get. Even with the recent recovery in prices, we still hold that stocks will be more productive than bonds over both the near and long-term.

Some Numbers for Comparison:

The following table compares the main indices against which fund performance is measured. All figures are for the periods ending 3/31/06.

Source:  Thompson Financial