The Quarter In Review, A Silver Lining
By Marjorie L. Fox,JD, CFP®, AIF®
A Silver Lining.... If there is one thing that the current markets prove, it is that itpays to invest in commodities. With U.S. and international equities and REITs down and bonds flat, theonly asset class that was up meaningfully in the second quarter was the commodityasset class. Prices of agriculturalproducts, industrial metals, precious metals, and crude oil - as any car ownerknows - hit record highs.
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.
Truth and Consequences....Crudeoil hit an all-time high of $146 a barrel, up more than 46% for the year'sfirst half. Many see demand forraw materials from China, India, Brazil and other fast-developing economies behindthe commodity boom. Othersbelieve that the boom is driven by speculation.
Whether or not speculationis exacerbating supply/demand imbalances, consumers and businesses are feelingthe effects. With higher food andenergy prices, consumers are finding it difficult to maintain previous purchaselevels of other goods and services. Spending growth across the global economy has been slowing.
The near doubling ofoil prices in the past year is leading to a huge transfer of wealth topetroleum-producing countries. Ina recent report titled A Monumental Petro-WealthTransfer, Stephen Jenestimates the revenues of oil-exporting countries to be $7 billion a day, or$2.5 trillion annually. Even moreremarkable, the reserves of oil-exporting countries, which total an estimated$140 trillion, are now almost three times the size of global equity markets,which have a combined market value of around $50 trillion.
The S&P 500, aRide to Nowhere? The contribution of commodities to returns ofportfolios in 2008 is one example of the benefits of investing in equity assetclasses other than U.S. large company stocks as measured by the S&P500. In fact, investors who puttheir money into the S&P 500 a decade ago have ended up with an averageannual return of only +2.88%. Incontrast, average annual returns for the ten years ending June 30, 2008 for theother equity asset classes (as measured by their benchmarks) are as follows: U.S. Equities, Small: +5.53%;International Equities, Large: +3.70%; International Equities, Small: +9.29%; Real Estate Investment Trusts(REITs): +10.65% and Commodities: +15.50%. And,even U.S. Fixed Income outpaced the S&P 500 at 5.68%.
Looking Ahead....Asthis newsletter went to print on July __, theS&P 500 was in its first bear market (defined as a decline of 20% or more) since2002. On July 9, the S&P 500 fellto 1,244.69, more than 20% below its record close on October 9, 2007. But, that should not surprise...theS&P 500 has experienced a 20% pullback every five years or so since1900.
The principals ofFox, Joss & Yankee havesuccessfully navigated through a number of financial crises in almost twodecades of managing portfolios. While each of these periods presented its ownparticular challenges, a common denominator was a sense of accelerating bad news and escalatingfear. In this type of environment,a sense of perspective has helped our clients stay the course. Market downturns invariablypresent opportunities, and our rebalancing discipline is the best way to takeadvantage of them.
Please feel free to contact us if you have any questions oryou would like to schedule a meeting. We appreciate your continued trust andconfidence.