Fourth Quarter Market Review
Most of the major stock indices recorded declines for the
fourth quarter, but managed to finish the year in positive territory. Market activity during the quarter was characterized by continued weakness in the financial sector (i.e., housing, real
estate and banks) and increased volatility in stock prices. The
emerging markets were a notable exception; strong economic
fundamentals enabled the benchmark to achieve strong gains
for the quarter and year.
Most of the major fixed
income indices finished
the quarter and year in
the plus column. This
feat was made possible by
the world’s major central
banks, whose frequent and
coordinated interventions
pushed interest rates lower
and helped the markets
regain some sense of
normalcy in the wake of
this summer’s credit crisis.
The actual returns of
some of the more widely followed
market indices
are provided in the table below:
Outlook
As we look ahead to 2008, we anticipate that the aftershocks of
the credit crisis will determine the course of the global economy
and investor sentiment. The highlights of our outlook include
the following:
- Historically, broad-based market advances do not occur
without the participation of the financial sector – especially the
banks. Therefore, until the banking industry begins to show
some signs of a bottom, it is likely that the domestic stock
market will continue to have a choppy, downward bias. In other
words, it is likely that we are in the midst of a normal correction
(i.e., a decline of at least 10%).
- Given the
widespread anxiety
over the quality of
loan portfolios and the
adequacy of loan-loss
reserves, bank stocks
are unlikely to recover
until late winter, after their audited financials
have been completed.
If the audits reveal
more loan problems, it
is likely that the broad
stock market averages
will experience
additional weakness.
- Another potential
complication is a
slowdown in consumer
spending. While lower
interest rates may take
some of the sting out
of anticipated mortgage resets, declining home values coupled
with increases in energy and food prices raise the specter of the
housing-led slowdown morphing into a consumer-led recession. However, strong export growth makes this a low-probability
scenario at this time.
- A weak dollar and large budget deficit make additional
interest rate cuts problematic for the Federal Reserve. Additional
rate cuts could weaken the dollar further, threatening its reservecurrency
status. Therefore, we do not anticipate significant rate
cuts near term. We do, however, expect the world’s major central
banks to work in a coordinated fashion to improve the liquidity
of the credit markets.
- The economic outlook for international markets remains
quite strong, particularly in the emerging markets. While
countries that rely heavily on exports to the U.S. could feel the
impact of a slowdown in our economy, recent history suggests that any shortfall would be absorbed by strong domestic demand or
exports elsewhere. Therefore, we continue to expect positive returns
from foreign markets, albeit at more modest levels than in recent years.
- The recent assassination of Pakistani opposition leader Benazir
Bhutto is a stark reminder that the world remains a dangerous place. Current equity valuations do not reflect an increase in geopolitical
tensions or terrorist activity, especially within the emerging markets.
- While periods of market volatility are always unsettling, we do
believe the current environment has a silver lining: Risk has become
more appropriately priced. As a result, lenders are more discriminate,
borrowers are more cautious and greed is less prevalent. This should
help the markets find a new
equilibrium, and set the stage for
the next cycle of prosperity.
Portfolio Strategy
Over the years, a number of
clients and colleagues have shared
their financial-oriented New Year’s
resolutions with us. In most cases, these resolutions were the result of a
poor investment decision. Considered as a group, they encapsulate the
basic tenets of successful investing. In the spirit of the holiday season,
we share some of our favorites.
- I will not chase last year’s popular stock or mutual fund.
- I will not confuse activity in my portfolio with progress in
my portfolio.
- I will reinvest at least half of any unexpected profit.
- I will remember that all markets run in cycles, and that having
a diversified portfolio means that not all of my investments will
work at the same time.
- I will remember that all investments involve risk, even if that risk
is not apparent.
If you have a resolution that you would like to share, please send us an
email. In the meantime, best wishes for a prosperous New Year.
(c) Chess Financial
www.chessfinancial.com
|
