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Market Commentary
4th Quarter 2007
The stock market capped off a wild year
with another wild quarter. After several years of unusually low
volatility, stocks made up for it by staging some rather dramatic
swings. While nearly every major stock average finished the year with
gains, the weakness in the 4th quarter hampered performance.
Investor optimism waned as economic data pointed to slower growth and
financial firms continued to grapple with fallout from sub-prime
lending. With many major U.S. stock indices holding 20-30% in financial
related stocks, they were unable to avoid the carnage. However,
commodity stocks and commodity related sectors were able to move ahead
despite the negative mood.
The Federal Reserve
Board held center stage as they continued their rate cut campaign.
The Fed cut rates further during the 4th quarter to help
alleviate pressures on the ever-weakening consumer. Unlike the cuts
made in late summer, equity investors did not cheer the moves. In fact,
many now fear the Fed has been too slow to react to the unfolding credit
crisis. Economic data point to further weakness, but the Federal
Reserve remained keen on inflation working its way through the economy.
With energy and other commodity prices soaring, the board reserved more
aggressive cuts. Investors reacted to the Fed action by pushing prices
lower on stocks while bidding up prices on high quality bond issues.
Bonds got a bounce from the
flow of cash out of equities. As more talk of a potential recession
made its way through the media, cash piled into bonds especially high
quality issues. Escalating bond prices forced down yields leaving bond
investors with fewer income choices. Treasuries surged in the 4th
quarter with a slight pause in early December as inflation fears
swelled. Not all fixed income instruments benefited equally from the
advance. Low quality bond issues tied to financial companies ensnared
in the sub-prime debacle did not fare so well. Concerns over credit
downgrades and even defaults kept these issues in check.
Domestic and International Markets
The 4th quarter proved
challenging for most stocks and sectors. After a third quarter that saw
a decent rebound starting in mid-August, the positive traction wore out
for equities in general, falling prey once again to weakness in the
financial and consumer cyclical areas of the market. All told, there
were only nine sectors out of the 40 that we follow that finished in the
black for the final quarter of 2007. The broad U.S. indices suffered
because of the financial exposure. And small cap stocks performed
poorly actually finishing in the red for the year. Most large cap
averages were able to hold onto gains. On the sectors front, oil was
the winner, which further padded its gains for the year. Precious
metals also posted impressive year-end results. Not surprisingly,
financials and consumer cyclical held the bottom spots adding more
downside to an already weak showing in 2007.
International markets felt some of the heat from the sell off in the
U.S. International markets, particularly emerging markets, maintained
healthy gains for the year but were not immune to the volatility. Many
posted new highs in October but gave back some of those gains in the
weakness that followed. Emerging markets in Latin America, China, and
India hovered near the top of the performance charts, but slowing U.S.
demand could play a role in 2008. Investors abroad continue to funnel
money to their local economies, and this has helped offer stability in
these global economies
Fixed Income
The fixed income marketplace continues
to post smaller yields, but the loss of income has been somewhat
offset by an increase in prices. High quality bonds became a haven as
money looked for safety. Treasury issues bounced higher as the main
beneficiary of this transfer of assets. Funds came from stock
positions as well as junk issues and mortgage backed securities being
squeezing in the credit crisis. Fears of an economic slowdown in 2008
will likely offer continued support to bond prices, but inflation
concerns could keep advances in check. Nevertheless, yields have
likely reached their peak for this cycle.
Where to go from here?
There seems to be no end to the stream of bad news, and many will react
with their feet. Recession or not, 2008 will prove challenging as we
face not only uncertainties around the growth of the economy but also a
change in the White House. Stock markets do not like uncertainty. To
do its part, the Federal Reserve will try to maintain accommodative
monetary policy, but we must do our part to balance risk and reward.
While this fear will certainly create opportunities, patience may be
needed as the opportunities unfold.
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.
© 2007 Future Finances, Inc. All rights reserved.
