What’s Been Happening?
After recovering from swoons in March and August, the US stock market measured by the S&P 500 peaked for the year in early October then finally fell once more in the fourth quarter. Despite the bumpy ride, the index’s loss for the quarter was limited to 3.3%. Emerging markets continued to be a bright spot and high quality intermediate government bonds benefited from a continued flight to quality. Markets continue to be volatile as uncertainty persists around the health of the economy, energy prices, the housing market and the dollar.
Trends to be Aware of
A recession is certainly possible and one may already have started. It will take months for economists to agree whether we have even entered a recession or not.
Our reading of market history teaches us not to be overly concerned about the prospect of a recession. Recessions are a natural part of the ebb and flow of economic cycles and shouldn’t be feared but rather expected. Having said that, over the last 70 years there have been just 12 recessions. If they occurred on a regular basis, that would be one every 6 years. The average price change in the S&P 500 during those recessions was -4.2%. But only half of the 12 recessions resulted in stock market losses 1. According to the National Bureau of Economic Research, the group charged with declaring the beginning and end of recessions, the average recession lasts just 10 months.
For us, the bottom line is that recessions are short-term events and should not be a major concern for someone invested in a diversified portfolio that includes stock, bond and alternative funds. An old Wall Street saying worth repeating is that the stock market often moves two steps forward and one step back. Over the last four or five years, properly allocated investors have certainly enjoyed the two steps forward part of the statement. It would seem naïve to believe we can avoid a step back from time to time. Maintaining an appropriately allocated portfolio with the disciplined rebalancing that implies, allows us to be positioned to earn the more predictable long term market returns.
What To Expect From Here
While we don’t make predictions, at some stage we would expect the dollar to rebound from its significant multi-year depreciation against the other major currencies of the world. International equities have generally benefited from the relative strengthening of foreign currencies. Should that trend reverse, we would expect international equities to post lower returns.
Some Numbers for Comparison:
The following table compares the main indices against which fund performance is measured. All figures are for the periods ending 12/31/2007.
|
Index |
What it Measures |
Last 3 Mos. |
Last 12 Months |
3 Years, Annlzd |
5 Years, Annlzd |
|
Standard & Poors 500 |
U S Stocks w/div |
-3.33% |
5.49% |
8.61% |
12.83% |
|
Russell 2000 |
Small Stocks |
-4.58% |
-1.57% |
6.80% |
16.25% |
|
Morgan Stanley EAFE |
Foreign Stocks |
-1.71% |
11.63% |
17.32% |
22.08% |
|
MSCI Emerging Mkts |
Emerging Mkts |
3.66% |
39.78% |
35.60% |
37.46% |
|
DJ World Stock Index |
Global Stocks |
-2.28% |
10.64% |
14.32% |
18.80% |
|
Real Estate Inv Trusts |
Real Estate |
-12.61% |
-18.15% |
6.73% |
16.91% |
|
Lehman 1-5 yr Gov’t/Cr |
Bonds |
2.54% |
7.27% |
4.29% |
3.38% |
|
CPI |
Inflation |
.81% |
4.15% |
3.37% |
3.05% |
Chart Data Source: Thomson Financial/p>
1. Hayes Advisory, LLC
