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July 2008 |
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Dear Client: The first half of the year ended just as it began—with significant stock market losses. The S&P 500 Index fell 8.4%, its second worst month since September 2002 (January 2008 being the worst). Overseas the MSCI EAFE Index dropped 8.2%, its worst performing month since September 2002. Recall that September 2002 marked the beginning of the end of the 2000•2002 bear market. The lows of September 2002 were retested in March 2003 after which point the global stock market entered a 5-plus year bull market. Both at home and abroad, there was very little difference in performance between large-, mid-, and small-caps in June; however, growth clearly outperformed value at each level of market capitalization. Of course, even the best-performing growth categories still sustained significant losses for a one-month period. There was one area of the market that held up well in June on a relative and an absolute basis—commodities and commodity producers (i.e. natural resource companies)—and fortunately, that is an area that is a part of our current trend allocation. The Dow Jones AIG Commodity Index gained a whopping 8.9% as energy, food, and metal prices continued to surge. The S&P North American Natural Resources Sector Index—a proxy for the stocks of commodity producers—also managed a positive return to the tune of 2.5%. Rising Unemployment A 5.5% unemployment rate is not bad in and of itself, as the average unemployment rate since 1948 is 5.6%; however, it is clear that unemployment is clearly on the upswing, which is what spooked investors and led to the sell-off on June 6. As we have noted many times before, we do not incorporate economic analysis into ACTIVE PORTFOLIO ENHANCEMENT® because economic data is not all that useful in predicting future stock market performance. According to JP Morgan, there have been 19 prior instances since World War II when the unemployment rate increased at least 0.5% over a one-month period. The average stock market return one year after the jump in unemployment is 28.2%. The “worst” subsequent one-year return was a gain of 17.6%, which occurred in 1960.
Declining Consumer Confidence As you can see in the chart to the right, the S&P 500 Index tends to perform very well in subsequent one-year periods after significant, multi-year lows in consumer confidence are reached. Sincerely,
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