Marketing Commentary- Q2 2008

What’s Been Happening?

With the exception of small company stocks which posted a modest gain, every index we track in this report was down for the second quarter of 2008. This pullback from the October 9, 2007 recent market peak officially places us squarely in a bear market for US stocks. International stocks have not been spared and emerging market stocks which held up relatively well over the last couple of quarters have now joined in the pain. For example, in the first six months of 2008 a major index in China was down 46% and India was off 34% despite economies still growing at approximately 10% per year.

Our first quarter 2007 What’s Been Happening page showed all positive returns in the four index return columns from three months to 5 years annualized. A lot has changed in the intervening five quarters. As you will note below, most return figures for the last 3 months and 12 months are now negative, but all returns for 3 and 5 years are still in positive territory despite the recent downdraft.

Trends to be Aware of

Interest rates are generally lower now than a year ago as the Federal Reserve has reduced rates in an attempt to bolster the economy. Unfortunately, the credit crunch continues to play out as the stock prices of mortgage guarantors Fannie Mae and Freddie Mac and many banks come under increasing pressure. In our opinion, the Federal government will not let either of these former government agencies fail and will pull them back into the fold if necessary to prevent a crisis of confidence. Housing is too important to the overall health of the US economy, for the government to stand idly by. A number of smaller banks that engaged in imprudent mortgage lending practices such as IndyMac have been allowed to fail and have been taken over by the FDIC. Congress and the Federal Reserve Bank are in the process of enacting laws and rules to put an end to some of the deceptive practices used by aggressive lenders.

Nationwide housing prices are now approximately 20% lower than they were a year ago. It is not clear yet how much further housing has to fall but lower prices will inevitably provide increased demand especially as interest rates remain relatively low and rental rates firm.

Oil prices have risen to over $140 per barrel. Even though oil has nearly doubled in the last year, the prices of large oil company stocks such as Exxon Mobil and Chevron remain flat. Interestingly, the value the market places on these stocks as measured by their price to earnings ratios [P/E] of 11 and 10 respectively is roughly half the 21 P/E of the overall market. These valuations lead some to believe that the market as a whole does not expect the price of oil to remain this high indefinitely.

Staying invested in globally diversified portfolios of funds in an appropriate stock/bond mix will position us to benefit from the eventual rebound.

Some Numbers for Comparison:

The following table compares some key indices against which fund performance is measured. All figures are for the periods ending 06/30/2008.

Chart Data Source:  Thomson Financial