Market Turmoil

The market has had a rough ride the past few weeks--this is no longer news. Compared to previous mini corrections we've seen over the past four years, this downturn is actually based on something real--the subprime mortgage fiasco, which has for all purposes shut down the credit markets. Rather than get into details of what happened, let's focus on the present. The Federal Reserve as well as other central banks continue to pump liquidity in the markets--this is exactly their role: to stabilize a credit crunch situation, lend credibility to market participants and to basically be lender of last resort. This is a good thing. However, it is very difficult to determine how much this will permeate the rest of the economy. Certainly Wall Street has been shaken up--we will probably see far fewer hedge fund managers (this is a positive in my view). The real estate sector including home builders have gotten crushed. I don't know how long this will take to work itself out.

As far as investments, the small cap sector continues to underperform with a meager 1.8% year to date return. Specifically, small cap value, which has been a star over very long time periods, is showing a -5% return for the year. Large company stocks are up 3.9% for the year and the leader of the pack is the mid cap style with a 5.3% return. You can see the variability of returns among market capitalizations is support for having a diversified portfolio.

Today, both the DOW and the S&P500 have corrected 10% from their highs. This is considered a normal market correction. No one likes when the market goes down and it very difficult to not be emotional and start selling. We have gotten so used to the market going up that we forget how volatile it can be. The media just perpetuates the feeling of fear.

As always, I take a long term view of the markets and look for opportunities to buy rather than sell during these tumultuous times. For those of you who don't watch Bloomberg TV everyday, when you receive your August statements, please don't panic. If anyone is sitting on uninvested cash, we should probably talk and find a place to invest that cash.