Quarterly Commentaries
From the bursting of the housing bubble to the backdating of stock options, 2006 proved to be a memorable year for investors. War continued in the Middle East, the balance of power shifted in Washington, and the price of oil soared to nearly $80 per barrel before falling below $60. Ben Bernanke proved to be a worthy successor to Alan Greenspan as Fed chairman and, most importantly, the majority of asset classes did well.
Turbulence plagued the capital markets in2007. Investors will remember the year for the global credit crisis triggered by a housing slump in the U.S. and a wave of mortgage delinquencies. MerrillLynch, Citigroup, and other investment banks holding mortgage-related securities absorbed $100 billion in losses, named new chief executives, and sought capital infusions from investment funds controlled by foreign governments. Bank of America initiated a bailout/acquisition of Countrywide Financial, the nation's largest mortgage lender, for $4 billion - a fraction of the company's $24 billion market value just 12 months earlier.
Who Would Have Thunk It?! At the end of the first quarter of last year, with U.S. large cap equities, as measured by the S&P 500 index, down 11.7% following the horrendous collapse of 2008 – who would have thought that the markets (U.S., International, Commercial Real Estate, and Commodities) would have ended 2009 with a rally of historic proportions? We didn’t predict it...but as you know, we are not in the business of predicting or speculating. Investors with a long-term strategy and an eye on the history of market cycles could have predicted that such a rally would happen – just not the timing of the rally.
The first half of2008 demonstrated once again that equity markets are predictably unpredictable in the short run.A sharply negative first quarter in U.S. and international equities wasfollowed by two months of positive returns, but the selloff resumed in June. With the S&P 500 down 11.91% forthe first half of the year, the silver lining was the commodity asset class.
Living up to one of Wall Street's oldest sayings, stocks flourished in the second quarter despite investor fears. U.S. and international equities began a surge during the second quarter that stalled in June, but resumed in July. And, markets will continue to climb if worries (e.g., housing and subprime mortgage market woes) are held in check by developments that investors find reassuring (e.g., a booming global economy and corporate profit growth).
Hold On, Hold Out… Perhaps the best news we can convey to our clients is that the lows the equity markets hit in the first quarter have not yet been re-tested. Moreover, staying invested in the equity markets has paid off in the first half of 2009. U.S. large cap equities, as measured by the S&P 500 index, finished June with their best quarter in more than a decade.
Given the turmoil inthe capital markets, it seems fitting to review our investment strategy and thesteps that we have taken/are taking with our clients and their portfolios. When we effectively manage whatwe are able to control, we reduce the impact on portfolios of what is beyondour control.
Commodities, the worst performing asset class of 2006, turned in the best performance of the third quarter. The price of oil soared above $80 abarrel, and gold ended the quarter at $742 an ounce, its highest close since January 1980. Although REITs, the best performing asset class of 2006, recovered from their second-quarter sell-off, they remained the underperforming asset class year-to-date.
The first quarter reinforced the value of an investment strategy that includes the fixed income and alternative equity asset classes. Reflecting global economic and financial woes, domestic and international equities were down sharply, with losses on broad indexes in the 9% to 10% range. On the bright side, domestic and international fixed income, and the domestic real estate and commodity asset classes generated positive returns. Unfortunately, those returns were not enough to offset declines in domestic and international equities.
VOLATILE... Perhaps that is the most appropriate word to describe the equity markets in the first quarter of 2007. Over a period of just three weeks in the middle of the quarter, the world's equity markets gave up their year-to-date gains, and then some. U.S. small company stocks fell almost 7%, U.S. large company stocks fell almost 6%, and international equities fell almost 5%. Perhaps most dramatic was real estate's 12.2% loss, which came after a one-month gain of 8.42% in January!
2008 Redux….The first quarter of 2009 looked reminiscent of 2008. The fixed income asset classes continued to provide stability, and the equity asset classes declined. A rebound in March was not enough to make up for the battering in January and February.
Are the Markets Back to Normal? So the past seven months have been quite an example of "upside volatility!" While most "experts" did not predict the bear market of 2008 through March 9th of 2009, neither did they predict the enormous rebound that the markets have made since March. Such volatility and unpredictability in the capital markets is what makes the active management of investment portfolios so difficult. At FJY, we continue to strongly believe that the most effective strategy is exposure to all of the world’s markets.