December 1, 2008

 

 

S&P 500                                                -16.79%

Barclays Aggregate Bond Index              -2.36%

 

 

 

During the month of November, the U.S. equity market continued its downward spiral with the S&P 500 falling another 16.79% for the month. In contrast to the stock market, the Barclays Aggregate Bond index fell only 2% for the month. Government bonds outperformed all other assets classes and were the only asset class with the exception of cash that had a positive return for the month.The yield of the 10 year Treasury bond fell to the lowest levels in recorded history with the yield ending the month below 3 percent. This flight to the superior liquidity and safety was in response to the acceleration of the credit crisis and fears of a deeper recession.

 

U.S. Economy

 

Economic growth turned negative in the 3^rd quarter as the Gross Domestic Product (GDP) fell -0.03% for quarter. We expect the U.S. and the global economy to remain weak through the remainder of the year and well into next. During the month, the Department of Labor reported a September unemployment rate of 6.5% which was the highest since the recession of 2001. Unfortunately, we expect continued economic weakness and additional job losses.

Government Action

 

After lowering the Fed Funds rate another ½ percent at the conclusion of the October meeting of the Federal Open Market Committee (FOMC), the Fed Funds rate stood at only 1%. Despite our belief that the Fed will continue to lower interest rates, we believe the Federal Reserve will have limited success. Furthermore, the dramatic actions by the Federal government, both in the market and more importantly in the economy, have failed to stem the crisis. After unprecedented intervention in the U.S. financial system including the November bailout of Citigroup, we believe investor focus will turn to Congress and the new administration. Following a period of political posturing by both the Democrats and the Republicans, we expect an economic stimulus package will ultimately be passed sometime early next year.

 

Current Investment Outlook

 

After a dramatic decline in the equity and bond markets over the past year, what should individual investors expect for the remainder of the year? The market decline in equities over the past year has failed to curtail many investors’ efforts to predict the bottom of the U.S. stock market. However, with the U.S. in the early stages of a recession, the economy, corporate profits, and subsequently stock prices will remain under pressure into 2009.

 

Within the equity market, economically sensitive sectors such as consumer discretionary, financial and industrial should be particularly vulnerable. We recommend individual investors remain in defensive stocks including consumer staples and healthcare where we still expect positive earnings growth. Overall, we expect that the U.S. equity market will continue to experience the headwinds of an economic contraction, and investors should continue to seek the safety of defensive stocks.

 

Finally, despite our belief that equities will ultimately reward investors, fixed income investments should continue to outperform equities. Although, we see little value in the Treasury market; we find attractive values in many sectors of the fixed income market. We continue to recommend high quality bonds including municipals, and investment grade corporate bonds.