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.