The S&P 500 closed yesterday (Friday) at 1260.  Two weeks ago it closed at 1260, four weeks ago it closed at 1262, and 9 ½ years ago it closed at 1260.  So where do we stand?  Oil prices have fallen and gas stations are able to use the number 3 again.  The dollar is stronger and at a five week high.  Freddie and Fannie got a “hand up” (or “hand out”).  We also had a few more financial companies write off another gazillion dollars, yet actually saw their stock prices move up a bit.  So, the question is:  Has the market bottomed?

Remember, the market looks forward and historically runs six to nine months ahead of the economy.  The question then arises, is the economy improving, and are we moving out of recession (and yes, we are in recession.)  With eight months of negative jobs numbers, a 4th quarter revised GDP in the negative, an official bear market, and inflation running at 4%, I don’t think there is much argument on whether or not we are in recession (I like the term “mild contraction”).  Actually, history tells us most leading economists have called twelve of the last three recessions (not a typo, but a joke).

The problem is, when we finally determine that we are in recession, it usually comes at the point when the economy is coming out of the recession.  Though we feel the market might have found some footing, we do feel there are headwinds that could keep the market from moving and sustaining higher levels.  Uncertainties with the election, continued high energy prices, the depressed housing market (including the coming surge of mortgage resets) and inflation concerns (which will prompt the Fed to raise interest rates) are a few of the headwinds we still face.

All this being said, we are still firm believers that the US and global economies will work their way through these rough times. While we are facing tough times right now, equity valuations appear to be quite reasonable and we do see upside once economic conditions begin to improve.  The market has presented challenges that have been seen before.  The key is risk management.  We will continue to adjust allocations and to diversify appropriately based on economic expectations.  We feel that absolute return and the addition of a non-correlated asset class is prudent for most portfolios moving forward.  Further discussions about this will be forthcoming.

July Equities Summary: 

In July, equity market returns were pretty flat.  The bright spot was domestic small cap which showed a nice gain for the month (+3.70%).  While the Dow was up slightly for the month (+.25%), the broad market was down about -.84% in July.  This month was the international markets time to feel some pain as they were down about -3.20% for the month and now stand at a negative -13.44% for the year, compared to -13.00% for the Dow.

July Fixed Income Summary:

Slightly higher interest rates held down total return in fixed income as the Lehman Aggregate Index was down -.08% for the month (+1.04% YTD).  One note of interest is that municipal bonds rallied again as the Lehman Muni Index was +.38% for the month (+.40% YTD).  This is significant in the fact that muni yields are now coming closer to being in line with their historical spreads in relation to comparable treasuries.