The Quarter In Review, Volatile…

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By: Marjorie L. Fox, JD, CFP, AIF

VOLATILE. . . Perhaps that is the most appropriate word to describethe equity markets in the first quarter of 2007.  Over a period of just three weeks in the middle of thequarter, the world's equity markets gave up their year-to-date gains, and thensome.  U.S. small company stocksfell almost 7%, U.S. large company stocks fell almost 6%, and internationalequities fell almost 5%.  Perhapsmost dramatic was real estate's 12.2% loss, which came after a one-month gainof 8.42% in January! 

On February 27th, theheaviest trading day ever for stocks, media outlets reported the largestone-day plunge in the Dow Jones Industrial Average since September 11th,2001.  But almost as quickly as they fell, the markets recovered.  As shown in the table to the right,every asset class ended the quarter posting flat or positive returns. 

Analysts have identified threeprimary causes of the startling plunge in late February. 

  • Former Fed chairman, Alan Greenspan, indicated his belief in a weakening economy and potential U.S. recession.
  • A sell-off in China's leading stock index was seen as a sign that fast-growing emerging markets might be due for a correction.
  • The impact of subprime mortgage debt on the overall housing market and domestic economy continued to worry investors. 

So should investors be concernedthat the mid-quarter sell-off signals the end of a bull market, or was itmerely a hiccup?  Only one thing iscertain, the market will continue to be volatile.  As reported in the Wall Street Journal on February 28th,Alan Greenspan warned just days before the drop:  "We do not and cannot look into history without being veryconcerned when you see the absence of awareness and concern about risk that wesee today."  Perhaps February 27thgave investors a much needed wakeup call. 

Once again, you have proven thatour clients are not typical investors. Despite the quarter's volatility, we received very few calls.  Fixed income helped stabilize yourportfolio, while alternative investments helped boost its performance. 

  • Fundamentals in the real estate asset class remain strong.  Domestic REITs with office properties are expected to do well in 2007, especially in cities where demand for space is strong and supply is limited.  International REITs are also expected to outperform, as Great Britain and Germany approved REIT structures early in 2007, and Italy is expected to follow later this year. 
  • After underperforming in 2006, commodities have shown their diversification benefits in the first quarter of 2007 with a return of over 5%.  While this is a volatile asset class, its return potential over the long term, coupled with its lack of correlation with stocks and bonds reduces overall portfolio risk while enhancing returns. 

In the face of uncertainty,maintaining a disciplined approach to investing is important.  The challenge is to continue to investfor long term performance without being distracted by short term marketvolatility.  The markets willalways ebb and flow, and we encourage you to remain committed to your strategyin order to maximize returns over the long term.