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.

Two Bottoms in place?

OK, so I spoke to soon. I knew it was bad karma to comment on how well the market had performed since it's low in August. Oh well, so much for timing. For those of you not watching, the market retreated to it's August lows last week on renewed concerns of the credit markets. The past two days, we have rallied because of once again, the market's expectation that the Fed will lower rates. I do think the Fed will continue to lower rates and be the lender of last resort in the short term credit markets. You can't imagine what a huge market this is and how vital it is in companies' ability to do business. If you can't borrow in the commercial paper market, you may as well shut your doors--especially if you are a financial company.
Value stocks in general have come back to life somewhat--but for the year, the growth stocks still take the prize. Real estate and small cap value have negative returns year-to date. These two areas have performed phenomenally this decade--it was time for a breather.
It will be interesting to see how the market does into the end of the year, typically a good time for the bulls.
On an investment product note, more fund groups are coming out with products to help retirees spend down their nest-egg while keeping a solid portion of their portfolios invested for growth. Fidelity currently has a fund that pays out over the time period specified so that at the end , all of the assets have been paid to the investor. Vanguard has registered with the SEC for a similar type fund due out next year.
On a personal note, I will be beginning my term as President of the Financial Planning Association, Greater Hudson Valley chapter. I am really excited to be at the forefront of the financial planning community, one whose voice in politics legislative matters and education grows stronger every day.
I would love to hear your comments and questions!!

The market bottom is in place

Well, it is quite apparent now that the August lows in the market marked a great buying opportunity. This is usually the case, when fear is rampant and no one wants to step up to the plate to buy. Kudos to those who did put money in the market at that time. September, usually a bleak month for the market, proved to be one of the best Septembers on record. The S&P gained 4.3%, the Nasdaq +5.4% and the DOW was up 4.6%. The "Growth" strategy continues to outperform it's "value" and "blend" brethren for the first time probably this decade. Remember, value tends to outperform growth over long periods but in short time frames, growth can really skyrocket (think 1999, 2000). The Fed's action of unanimously cutting the fed funds rate injected the market with an incredible sense of relief that the worst is behind us. This doesn't mean the housing market has bottomed--I don't think it has. The Fed's action gave investors a reason to once again embrace risk as they put liquidity back into the market. And so, it's back to the races. Seasonally, the October through January time frame is typically the best time to be invested. I don't think this year will be any different.



For all you soon to be retirees, Vanguard has filed with the SEC to market three new funds that have managed payout options of 3, 5 and 7% annually. I think these funds will be very popular because it will make the process of drawing down assets straight forward. I will write about it as I get more information. This is really the first investment product that offers annuity like features without the drawbacks of annuities (high costs and irrevocable).

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.

Another quarter is over.

Half the year is complete--markets continue to perform extremely well. Over the past twelve months, the S&P is up about 20%. Forward looking indicators of economic growth still look good. Inflation in the mid 2% is certainly not the end of the world but the trend is clearly higher which is the one factor quite worrisome to the Fed. Bernanke and Co. opted to keep rates unchanged this week--a move that makes perfect sense.
The markets have been very volatile lately--as evidenced by an increasing VIX. Markets can consolidate by going up and down for a period of time. Is this the pause that refreshes? or a short term top? International markets continue to turn in blockbuster returns. Keep a keen eye on those holdings--feels like a bubble could be brewing--particularly China where the retail brokerages resemble Off-Track-Betting establishments and everyone's grandmother views the market as a get rich quick vehicle. In comparison, domestic markets look cheap.
The mid-cap sector continues to steal the show with year-to-date performance in excess of 10%...the growth style in this sector is up about 13%. Small caps are up about 8% while large caps lag behind with about 6.5%. Interest rates are higher--the yield on the 10 year note is about 5.05% up from a low of about 4.6%--the bond market is still perturbed by players' exposure to syndicated sub prime loans. Bonds could also be signalling higher economic growth rates.
Thanks for reading.

CFP Board announces new fiduciary standard

The CFP Board of Standards has revised its Code of Ethics. Now, all holders of the CFP(R) designation must act as a fiduciary in dealing with clients. This means that financial planners must put the best interests of clients first. "The revised standards require a CFP® professional to “at all times place the interest of the client ahead of his or her own.” The new language replaces the lower standard of “reasonable and prudent professional judgment” contained in CFP Board’s current Code of Ethics and Professional Responsibility". (excerpt from the CFP Board website). I have always held myself to this standard but I am happy to see that the investing public has gained an edge in dealing with financial advisors. This is an important accomplishment. To read more, go to http://www.cfpboard.org/media/release.asp?id=161.

On the markets, well not much to say. The fact that the DOW and the S&P keep setting new record highs is really not that big a deal to me--it's been seven years in the making! Actually compared to other segments of the overall market, like the international sector, the DOW and the S&P have lagged considerably and are probably undervalued. I noticed there is less talk of the Fed easing rates in the future, which seemed implausible to me, but certainly not to people like Bill Gross, portfolio manager of the largest bond fund in the world. I guess when you have a vested interest in lower interest rates, it tends to cloud your objectivity. This realization that rates are not going lower any time soon has not affected the stock market, not yet anyway--certainly has affected long term yields which have been rising of late.
May return numbers will be out soon--will write another post to see how the various market segments did this month. Thanks for reading.