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Randall Financial Group News

15-Jul-08

2008 Q2 Market Summary

Significant market volatility that has been the signature of equity markets for the past 12 months continued unabated in the second quarter. April saw a notable rise in stock prices as the Federal Reserve handled the Bear Sterns crisis and other investment banks remained solvent. By mid-May the Dow Jones Industrial Average reached over 13,000. But jitters in the financial sector, disappointing second quarter earnings results from many U.S. companies, and skyrocketing oil prices approaching $150 a barrel made the rally short lived. Equity markets reversed course and ended the quarter by visiting new lows for the year. The quarter finished with the Dow off nearly 20% from its high of last year. A 20% decline is considered the official measure of a Bear market, a mark that was then reached in the beginning of the third quarter. Not all sectors of the market were down in the second quarter. The S&P utility index was up 7.3% and the technology sector was up 2.3% for the quarter. Commodities like energy as well as other basic materials also showed strong performance.

Economic themes have not changed and the problems remain the same. Rising energy prices coupled with a struggling housing market have kept consumer spending at bay. With consumers accounting for two thirds of domestic economic activity, corporate earning cant help but be affected. Rising energy prices have also had the effect of raising prices for many consumer necessities like groceries and gasoline. These rising prices along with a rising inflation rate only put further pressure on consumer spending. Inflation has also put the Federal Reserve in a bind. Normally the Fed would lower interest rates in an attempt to stimulate the economy, something they started doing last September. But the Fed held rates steady at their last meeting and hinted at possible future rate hikes in order to curb inflationary pressures.

While most sectors were down for the quarter, the clear leaders of the decline were financial stocks, with AIG off 39% and Bank of America down 37%. The biggest decliner, however, came from the manufacturing sector with General Motors off 40%. Financial Stocks continue to be battered by turmoil in the credit markets as the effects of bad mortgage loans continue to be felt. The third quarter began with the FDIC takeover of IndyMac Bankcorp, the second largest bank failure in U.S. history. Markets are further concerned with the fates of Fannie Mae and Freddie Mac, the Government backed mortgage sponsors. Recent indications by the Government as well as past history indicated that the Government would not let these organizations fail although stockholder equity is likely at risk.

Many analysts have suggested that, until the residential real-estate market recovers, and financial stocks rebound, the broader market will continue to struggle. Oil prices will also likely have to stabilize before any optimism returns to the economy. We expect to see more of the same through the third quarter as lower volume associated with summer only adds to already significant volatility. It is unclear if we are at our lowest point or if things will continue to fall further. For this reason we believe it is imperative that investors maintain a well balanced and highly diversified portfolio which will inevitably include those sectors of the market that continue to prosper rather than trying to time further market declines. Investors with fresh cash to invest would be well advised to dollar cost average over a minimum 12-month period in order to help reduce timing risk.

While making money in rising markets is something almost anyone can do, not loosing too much in falling markets is the key to long-term success. It begins with a well-diversified portfolio and ends with having the confidence to avoid panic selling when things look their darkest. Investors who are able to achieve this will likely be rewarded.

Information presented here is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change.

© 2008, Randall Financial Group, LLC All rights reserved. Please Visit www.Rfinancialgroup.com

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