The Quarter In Review, Running for Cover
By Marjorie L. Fox,JD, CFP®, AIF®
Running for Cover....The first quarter reinforced the value of aninvestment strategy that includes the fixed income and alternative equity assetclasses. Reflecting globaleconomic and financial woes, domestic and international equities were downsharply, with losses on broad indexes in the 9% to 10% range. On the bright side, domestic andinternational fixed income, and the domestic real estate and commodity assetclasses generated positive returns. Unfortunately, those returns were not enough to offsetdeclines in domestic and international equities.
To Fixed Income....Bondsare supposed to be pillars of stability during times of tumult in the capital markets,and for clients of Fox, Joss & Yankee they were. Indeed, the broad Lehman Brothers U.S. Aggregate BondIndex - which tracks taxable bonds including Treasury notes, corporate bonds,and some mortgage securities - was up more than 2% in the first quarter. Treasury Inflation-Protected Securities(TIPS) were up more than 5%.
Yet, not every fixedincome investment provided a haven from the meltdown in subprimemortgage-related securities. A fifth of all investment-grade U.S. taxable bond fundstracked by Morningstar, Inc. were in the red. These are bond funds that Fox, Joss & Yankee does notrecommend - specifically high-yield, bank-loan, and ultra-short bond funds.
The credit crunch even extended to municipal bonds. Fears in the marketplace led to the selling of municipals and the buying of Treasuries, sending municipal yields soaring and Treasury yields plummeting. On March 31, yields of 10-year municipal bonds were higher thanthose of 10-year Treasury bonds. This should rarely, if ever, occur for one obvious reason: income from municipal bonds is exemptfrom federal income taxes. Consequently,investors are generally willing to accept a lower yield on municipals than onTreasuries. During the firstquarter, they were not; the prices of many municipal bonds fell. Notwithstanding, Thornburg Limited TermMunicipal Fund and the municipal bond portfolios managed by BreckinridgeCapital Advisors generated positive returns for our clients.
To Commodities....The run-up in commodity prices that began in2007 continued into the first quarter. A flood of investor cash seeking a haven from turmoil in the credit andstock markets pushed prices for energy, metal, and agricultural commodities torecord levels. Since commoditymarkets are denominated in dollars, the weak dollar also helped to push priceshigher.
But a broad selloffin mid-March underscored the risks inherent in this asset class. When the Federal Reserve's lower-than-expectedinterest rate cut on March 19 calmed fears of an inflationary spiral,commodities fell across the board. On that day, oil fell 4.5% or $4.94 perbarrel, its biggest dollar drop in over 17 years. Gold dropped $58.50 or 5.8%, its biggest decline in dollarterms since January 20, 1980.
Looking Ahead....Asthis newsletter went to print on April 21, the second quarter was off to a goodbut volatile start. Domestic andinternational equities had earned back half of their first quarter losses, andthe real estate and commodity asset classes had doubled their gains.
Where do the capital markets go from here? David F. Swensen, who has managed theYale endowment since 1988, was quoted recently in The New York Times as sayingthat, "For every smart person on one side of the question, there is anothersmart person on the other side." So, what should an investor do? In Mr. Swensen's opinion, "Stick to a diversified portfolio,keep your costs down and rebalance periodically to keep your asset allocationsin line with your long-term goals." We couldn't agree more.
All of us at Fox,Joss & Yankee thank you for your continued trust and confidence.