| It has been just over a year since mortgage originator New
Century Financial revealed mounting subprime-loan problems,
thus marking the beginning of the current credit crisis. New
Century is now bankrupt and, at last count, financial institutions
here and abroad have written off approximately $250 billion in
various loans and securities. As we suspected when we wrote to
you last quarter, the aftershocks of this crisis have set the tone for
the U.S. economy and investor sentiment thus far in 2008.
All of the major stock indices recorded declines for the first
quarter, as the credit crisis subsumed the municipal bond
insurers and the investment bank Bear Stearns. Most of the
major fixed income indices ended the quarter in positive
territory, reflecting unprecedented intervention by the Federal
Reserve. A notable exception was the high-yield segment of the
market, as investors continued to shun lower-quality securities.
The actual returns of some of the more widely-followed indices
are provided in the table below.
Outlook & Portfolio Strategy
While we could not have predicted the events that have unfolded
since the year began, we are pleased that our emphasis on
portfolio diversification has helped mitigate the impact of these
events on our clients’ portfolios. As mundane as this approach
to investment management may sometimes appear, it has proven
to be one of the best defenses against the inherent uncertainty of
the financial markets. Other highlights of our portfolio strategy
include the following:
- In portfolios with significant cash balances and modest
allocations to domestic stocks, the market’s weakness has given
us a nice entry point. We are moving cautiously based on the
belief that a meaningful recovery in stocks will not occur until
investor confidence returns to the banking sector and the
outlook for the U.S. economy improves.
- The decline in international markets during the quarter shows
that the health of the U.S. economy remains an important factor
in determining global stock prices. However, the economic
outlook for international markets remains solid, particularly in
emerging markets. Consequently, we continue to expect positive
returns from this asset class, albeit at more modest levels than in
recent years.
- The short-term, high-quality nature of our fixed income
investments have done well in the face of ongoing concerns over
deteriorating credit quality and rising inflation.
- While our move out of commercial real estate last year proved
timely, our intent is to reallocate to this important asset class,
but at prices below current levels. We will be monitoring this
situation closely in the months ahead.
In closing, the last six months reminds us that the most
challenging aspect of investing is often emotional, not financial.
It is easy to lose sight of your long-term objectives when
everyone around you is worried about what the next trading
session might bring. The silver lining to this myopia is that it can
create some excellent opportunities for investors who manage to
stay focused on the long term. We look toward the balance of
2008 with this thought in mind.
First Quarter Market Review
Market Review & Outlook
Bradley E. Turner
Executive Vice President & Chief Investment Officer
(c) Chess Financial
www.chessfinancial.com |
