Insights
Market Commentary - 1st Half 2007
Later in the second quarter, the near collapse of Bear Stern’s money-losing hedge funds caused another round of investor uncertainty and increased volatility. These concerns related to bad bets on sub-prime mortgage-related securities and sent another wave of anxiety through the markets, causing some of the gains posted earlier in the second quarter to be erased.
The chart below illustrates the week to week movements of the S&P 500 Index, the Dow Jones Industrial Average, and the NASDAQ Composite, which turned in total return performance gains of 7.8%, 6.3% and 8.1% respectively during the first half of the year.
Performance from the foreign stock markets, as evidenced by the MSCI World Index, showed a comparable gain of 7.6% for the same period.
Bonds, on the other hand, reported a much more modest gain year to date, as interest rates rose in all but the shortest maturities, causing bond prices, on average, to decline slightly during the second quarter, also giving back some of the first quarter’s gains.
The Lehman Aggregate Index, a popular benchmark for the bond market, posted a total return of 0.98% for the 6 months ended June 30, 2007. For most of the first half, investors were concerned that problems in the subprime mortgage market could spill over into the broader bond market, and that the impending reset of adjustable rate mortgages and increased inflationary expectations would threaten consumer spending and economic growth during the second half of the year. Interestingly, however, after a considerable period during which short term rates were higher than long term rates (referred to as an inverted yield curve, and a classic sign of impending recession), the term structure changed, towards the end of the quarter, back to its normal positive slope. Hence rather than forecasts for an economic slowdown, most economists have begun to see a greater likelihood for continued economic growth. As such, this not only reduced the probability that the Federal Reserve would reduce interest rates later this year, but also increased the likelihood that inflation would remain in check. The key question remains. How much of the surge in gasoline prices has passed through into the prices of other goods & services and how will that influence inflation expectations.
On the global front, expectations that a weak dollar and strong foreign economies (particularly from China, India) could have a positive impact on the domestic economy, by stimulating demand for US exports, thereby increasing capital expenditures and new jobs here in the US.
Nevertheless, the housing market remains weak, and promises to be a drag on the US economy, as both new and existing home sales continue to slip on a national level. Interestingly, though, the health of the housing market appears to be divided, as pockets of strength in various cities around the country continue to see price gains, thereby creating a wide range of views regarding the overall health of the economy and outlook for the stock and bond markets.
Against this backdrop, we continue to maintain an optimistic, yet cautious investment approach. We look for opportunities to take profits where tax implications permit and to rebalance ones investment portfolio based on personal investment policies, individualized investment objectives and tolerance for risk. Notwithstanding one’s specific preferences, we continue to favor a diversified approach, and strongly urge our clients to help us keep abreast of changes in their life/lifestyles or when noteworthy events occur which could possibly have an impact on their investment strategy.
Looking ahead, our goal is to formalize our investment process to allow each client to have a Personal Investment Policy Statement, whereby changes and increased communication can be submitted on a regular basis via our new website. In the meantime, please don’t hesitate to contact us if you’d like to speak with us - we’re always here for you.
