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Market Commentary
3rd Quarter 2007

The third quarter of 2007 provided a number of landmarks for the U.S. equities market, including the first print above 14,000 for the Dow Jones Industrial Average and subsequently the first drawdown of more than 10% since 2003. While July and August were rough months for many stocks, the historically foreboding month of September provided immediate relief.  Investors rode the wild roller coaster during the quarter as we witnessed swings of one percent or more during several trading days throughout the quarter.  And in some cases the up and down swings occurred back-to-back.  There was no shortage of volatility as was noted in nearly every indicator.

The Federal Reserve played a key role in the late quarter surge by offering a ½ percent cut in the federal funds rate.  While many expected a rate cut, the size of the cut caught most by surprise.  Investors cheered the reduction and sent stocks higher across the board.  Concerns over the housing crisis and credit markets seemed to melt away as trading volume swelled.  Economic news continued to point to a slowing economy, which offered the motivation for the Fed to initiate the rate cut.  In addition, core inflation measures revealed tame cost increases.  It appears as if there was a greater concern for economic weakness than inflation acceleration.  Economic weakness continues to linger on the thoughts of economists and traders, but thus far growth remains steady albeit a bit slower.

Bonds saw their share of volatility as investors swung from euphoria to fear.  Bond prices faced pressure heading in the quarter as stock markets posted new highs. However, as the market fell in late July, investors jumped to safety by moving into Treasuries.  This put downward pressure on bond yields (as bond prices rise, bond yields fall).  Not all bonds benefited from this shift. Higher risk issues such as junk bonds, faced selling pressure as investors sought safety in government issued bonds.  Bonds were able to eke out a small gain for the quarter to help bring most fixed income instruments into the green for the year. 

Domestic and International Markets

There was certainly no lack of excitement in the U.S. stock market during the quarter, but in the end, the S&P 500 and most other major stock indices managed to do what they have done in each quarter of 2007 -- record gains.  One of the important themes to develop in the quarter was the transition toward a more favorable environment for large cap growth stocks.  After more than six years, large company growth stocks have begun to show some strength.  On the downside, small company stocks and dividend based indices (i.e. value stocks) proved laggards thanks in part to the weakness in financial stocks.  The best performing sectors included precious metals, energy and industrial materials.  Global expansion continues to provide growth in these areas, and the relative strength continues to point to additional growth opportunities ahead.  Not surprisingly, the weakest areas of the market included those most affected by the credit crisis-- financials, real estate and home builders.

Continuing the theme we have seen for most of this year, international stock markets posted impressive returns.  Higher risk markets such as Latin America and China and developed markets such as Australia held the top spots.  Even after dramatic pull backs, emerging market stocks zoomed ahead to finish the quarter firmly in the green. A declining dollar also helped produce healthy gains for U.S. investors looking abroad.  Despite strength in the global market, Japan continued to struggle against other foreign markets.

Fixed Income

The fixed income marketplace enjoyed a relatively strong quarter, but in many cases it was only enough to get this asset class back to even for the year.  Panicked stock investors piled into Treasuries pushing yields down to levels not seen in several months. However, it would appear most of the gains would be short-lived as the stock market recovery lured capital from these fixed income instruments. While Treasuries were able to hold their ground, higher risk bonds (i.e. junk bonds) faced a sell off as fixed income investors shunned higher risk issues. 

Where to go from here?

We have now entered the seasonably favorable period of the calendar which should help buoy stock prices. However, risks remain alive as we evaluate the effects of a slowing economy and a still weak housing market.  We expect decent growth but need to focus on appropriate risk management

As always, please feel free to call us anytime you would like to discuss your portfolio.  We can review your current allocation of assets, reiterate your long-term goals, and determine if you have short-term funding needs.  It will also give us an opportunity to reconfirm the suitability of your long-term plan or to make any changes that seem appropriate.

If you have any questions, please feel free to contact us at 614-888-PLAN (7526).

Your friends,

              

Max T. Larsen, MBA, CPA, CFP™, CIMA                                  Bradley A. Huffman, CFP™         

Securities and investment advisory services offered through FSC Securities Corporation, member FINRA,  SIPC and a registered investment advisor.  Additional investment advisory services offered through Future Finances, Inc., a registered investment adviser not affiliated with FSC Securities Corporation and is not a broker-dealer.

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