U-G-L-Y

The best way to describe this market. Year to date as of Friday Jan 18th, the market was down anywhere from 10 to 12% with small caps being the worst performers. The real problem with this kind of sharp downturn in the markets is that no one sector has been spared. The whole notion of portfolio diversification goes out the window because in times of crisis, everything goes down.
The Fed has reduced the Fed Funds rate by 3/4% to 3.5%. This will directly affect anyone with a HELOC and adjustable rate mortgages. However, the impetus for such a move by the Fed, which to lower rates outside of an FOMC meeting is unusual and significant, is to raise the level of confidence of market participants. As of right this minute, the market has been open for 4 minutes and it is down tremendously--Nasdaq is down 5%.
While it is difficult not to feel emotional about losing money--it is times like this that we need to maintain rationality. While no investment is making money right now, we must feel confident in the fact that portfolios are well balanced and have been constructed to achieve long term financial goals and thus we are all long term investors.
I always wonder during times of crisis where opportunities may exist. Is there anything in the portfolio that I would like to own that I should be buying? General valuations seemed reasonable when the market was 20% higher, it has to be even more reasonable now.
As for what I am doing today, I am going to call my mortgage lender to see if I could lock in my adjustable rate (4.5%) for another five years--wish me luck.
I am available if anyone wants to talk.

A New Year

2007 may have marked the end of the bull run that began mid 2003. For the year, the DJIA was +8.9% but the S&P500 was only up 5.5%. The growth style of investing finally came back to life after years of under-performing. Large cap growth was up 14.2%, mid cap growth up 16.5% and small cap growth was up 8.8%. Small caps were the under-performer of the year with a "core" strategy posting loses of 1% and small cap value losing 5.5%. This is unusual since over long periods of time, small cap value has actually outperformed other size and style classes. As you know in investing, not every year is the same.
The great winner for 2007, once again, was international equity investing, up 12.4% and emerging markets up a whopping 36.4%--WOW.
I like to look at what the market is doing right now, rather than try to guess what the market could do in the future--most people don't guess very well, and it remains just that, a guess. Right now, the market is in a correction phase. Volatility has been rising which indicates fear and uncertainty in the market. The ECRI index of leading indicators has reached a six year low indicating real economic weakness ahead. However, bear in mind, the Fed has already injected quite a bit of liquidity into the markets via lower rates and availability of funds to corporate borrowers. They are also clearly committed to continuing in this way as economic growth (rather than inflation) has become their primary concern.
An interesting article in the Wall Street Journal makes a valid point about the market being a discounting mechanism and compares the current economic environment with the last recession in 1990-1991. At that time, the Fed was also very diligent about lowering rates and stocks went down early on, but the equity market actually turned around once it was apparent the recession would be quick and mild. The article didn't say that would be the case this time, nor am I, but a diligent Fed can make the difference in mitigating the severity of slowing economic growth.
The most important thing to remember is to be a long term investor. A proper and well balanced asset allocation which produces a long term average expected return that will allow you to achieve your financial goals is really all we are concerned about. But the market sure is fun to talk about!
Please let me know if you have any questions or concerns.