Wednesday, July 9, 2008

Jersey Benefits Advisors Newsletter Summer 2008

Market Watch

The chorus of troubling economic news continued to chip away at investor confidence with June being particularly brutal, and as the 2nd quarter of 2008 ended, the Dow Jones Industrial Average teetered on the brink of “officially” being in bear market territory. Of course by the conclusion of the 4th of July holiday, all of the stock market indices had succumbed to the dreaded 20% decline threshold, and there was no doubt the bear market was upon us. One might be tempted to ask what a good strategy might be to avoid being battered by a bear market. I would have to respond by saying the best strategy is to ride it out, prudently invest in as many sectors of the economy as you can, and enjoy the next recovery when it comes.

Nobody can predict with certainty when a bear market will begin and when it will end. Missing just a few days of being fully invested, when the market recovers, can do serious damage to your portfolio. In a study by Invesco Aim from December 31, 1997 to December 31, 2007 if an investor was fully invested in a fund that mirrored the S&P 500, the average annual total return was 5.8%, even though there was a bear market from March of 2000 through October of 2002. If an investor missed the best 10days by trying to time the market, the average annual return dropped to 1.02% per year. By missing the best 20 days, the average annual total return was –2.64%. If the investor missed the best 60 days, the average annual total return fell to –12.82%. The market rarely trumpets the next 300 point gain, so stay invested and dollar cost average.

If there is any positive spin I can offer to help ride out this rough patch in the market, it is to relay some research on bear markets by Bespoke Investment Group. They conducted a study of bear markets since 1940, and they found that the average bear market for the S&P 500 produced a decline of 30.4%. The length of the average bear market during that period was 386 days, and by the time the 20% decline threshold was reached, the bear market was 74% completed. While nobody enjoys a bear market, except the bears, it is somewhat reassuring to know that by the time you can confirm the fact that the bear market is official, it is almost over. The hindsight is much like officially designating a recession.
It is important to note at this juncture, by strict definition, we have not confirmed the economy is in recession. The first quarter GDP was revised to indicate the economy was growing at 1%. Unfortunately, this is not sufficient to support job growth and the unemployment rate has crept up to 5.5%. Along with slow economic growth, inflation has begun to rear its ugly head, so the Fed held interest rates at 2% in June, and indicated their concern about increased inflation in the minutes of the FOMC meeting.

The European Central Bank, citing inflation concerns in commodities, raised rates by 1/4 point, but indicated it was only a one time deal at this juncture. Of course nobody needs to hear much about the run up in oil prices, because we are confronted by it every time we fill up. Suffice it to say speculation, supply and demand, as well as the Olympics are all playing a part. Congress is trying to do something. God help us!

Here are the year to date numbers for the indices as of 6/30/08. The DJIA closed at 11,350.01 off 14.4%. The S&P 500 closed at 1,280 down 12.8% and the NASDAQ finished the first half of the year at 2,292.98 which is down 12.9%. Let the 2nd half begin.


As I previously mentioned the economy continues to limp along with meager GDP growth, but not enough to generate a sufficient number of jobs for everyone choosing to work. The effect of historically high oil prices continues to add inflationary pressure to the prices of other goods, especially in the area of food products, which rely on the use of energy to produce and transport them to market. Low interest rates make the dollar unattractive for investors who have been flocking to commodities to improve returns. This in turn has also added to the advance in oil prices.

As the credit markets continue to remain tight, consumers cut back on driving and other discretionary spending, and China as well as the other emerging markets feel the pinch of reduced demand for their products, there will be a further slowdown economically in this country as well in other parts of the world. Already the economies of the US and the European Union are exhibiting extreme signs of weakness. When the Olympics are finished this August, look for diminished economic activity in China, as a great deal of the demand for oil and other commodities has been to improve infrastructure and air quality during their day in the spotlight.
With all of the stresses on the US economy, confirmation of a recession could become a reality either in the second half of this year, or early in 2009. The healing process necessary to recover from the mortgage fiasco and oil shock is underway.

Hydrogen Electric Prototype By Honda

For anyone who may have missed a review published in late November of 2007, I wanted to mention the Honda FCX Clarity, a vehicle which will be leased in Los Angeles and other select markets next summer. What makes this car unique is the fact that it is propelled by hydrogen and electric power. Vehicles that use hydrogen with fuel cell technology instead of gasoline are the cleanest technology, because they emit only water vapor into the air we breathe. These cars simply do not pollute. They can also use hydrogen from domestic energy sources, reducing our dependence on oil. While the economic viability of this prototype vehicle is still in question, this technology could be one of the answers to truly breaking the grip foreign oil has on our economy. Perhaps we’re ready this time.

John H. Kaighn

Jersey Benefits Advisors