July 10, 2007
The Dow Jones Industrial Average (an index made up of 30 large, diverse companies) and the S&P 500 (the largest 500 companies in the United States), have each reached new highs in the last few months, thus topping their year 2000 peaks. Never mind the NASDAQ (an index typically associated with large technology stocks) – it is still about 50% below its year 2000 peak. This bull market we have experienced has lasted a little over 4 ½ years, which happens to be the average length of a bull market since 1942. Will the current bull market continue over the next couple of years or will we see the stock market head south for the winter?
One of the biggest economic stories during the second quarter of 2007 was the rising interest rate environment in the bond and mortgage markets. These increased rates had a negative impact on bond market prices – particularly the intermediate and long-term bonds – and will play a major roll in how quickly the real estate market recovers. Current inflation, however, seems to be under control. The Federal Reserve has refused to increase the federal funds rate from 5.25%, which is where it has remained for over one year now. There is little indication from the Fed that they will change this rate in the near future
After solid performances during the months of April and May, the stock market did not know which way to turn in June. Once again, the stock market had robust global economic growth at its back to help it along this past quarter. With the bond market selling off (which caused the higher interest rates), the stock market turned to corporate earnings to reinforce the higher valuations that are now attached to stocks. Due to these higher valuations, should corporate earnings stumble in the months ahead, I believe you will see investors sell stocks quickly. However, that does not mean that a small sell-off would be the worst thing in the world for us. A drop in the stock market will allow our mutual fund managers to purchase stocks selling at “discount” prices. This is good for our portfolios in the long run. I also believe that our current mutual fund managers are defensively oriented from the standpoint that they are looking for stocks that are already cheap, therefore, in theory they should not fall as much as other stocks might should a correction come about. As you all well know, there are no guarantees in this business – we will just have to wait and see. Overall, I am pleased with the performance of your portfolios so far this year.
If you have not stopped in to see us lately, please do not hesitate to contact Katie or me to schedule an appointment. Enclosed you will find your Portfolio Performance Summaries, Portfolio Holdings Statement as of June 30, and a quarterly Account Management Fee Statement. Please call us should you desire the most recent copy of our Form ADV, Part II. In addition, do not forget to notify us should your investment objectives or personal financial situation change.
Best regards,
William A. Bulloc