February 2009

The Year Ahead

Market opens the New Year with its worst performance in history, down 8.43% for January. Our results are posted on our performance page. On a positive note, despite the ravaged equity market, certain sectors (unlike last fall's debacle) bucked the tide. Portfolios that diversified into alternative investments (such as corporate, municipal, and sovereign and inflation protection bonds as well as commodities, gold and energy) did quite well. It will be interesting to see how the year plays out, but from my perspective, it looks to be a flattish first half for stocks with a pickup in the second half as the fiscal stimulus package starts to kick in. For the immediate future, here are some pros and cons which may in on determining the market direction (source largely from BCA Research and Lowry Assoc.)

• Stocks are inexpensive with a mountain of cash on the sidelines, but until the end of the economic malaise is in sight, investors are likely to remain wary.
• Speculation has largely been eliminated from the market, and this is bullish from a contrarian standpoint as market excesses have been unwound, but the technical picture remains bearish with weak breadth and a lack of positive momentum.
• The recent correction in the market was due to a lack of buying pressure unlike the corrections in the fall that were a result of an increase in selling pressure. This could be an indication that the November lows will hold, but until buying pressure increases, it is likely that any rallies will be contained.
• The attached chart (courtesy of BCA Research) shows where we are in terms of valuation and monetary conditions relative to the past fifty years. As you can see, monetary conditions have never been easierand valuations are modest. This combination has been the most positive for stocks in the past and hopefully this will prove true again as corporations and consumers gain confidence that the stimulus package is working.

-Joe