Stock markets around the world have rallied in recent weeks, giving investors well needed relief and a sense that the very worst is now behind us. We would suggest that the worst very well may be in the past for global stock markets. However, stock prices are unlikely to go straight up from here.

Just three weeks ago, global stock prices hit new lows and the Dow Jones Industrial Average reached 6500 – a whopping 58% percent decline from the record high set in October of 2007. During the market’s treacherous decline, there have been several periods similar to this latest surge where stocks advanced by 20%. Each has been followed by declines that have taken the indexes to new lows. This time may be different. Though stocks will likely give up recent gains once again, we doubt that the ensuing decline will pierce the lows set three weeks ago. Our research suggests that we continue to be in a bottoming process that will eventually lead to a new bull market. Market bottoms take time and allow the patient, careful investor to buy stocks at bargain basement prices.

From our experience, (and the horror stories we hear from novice investors) one should never invest all of one’s cash in one day, no matter how confident one might be about markets. In that spirit, you may be aware that we have already begun phasing in additional stock exposure in recent months. We are not sure how many buying phases will be required to reach your appropriate allocation to stocks, but will be looking to the action of the market to guide us. As usual, we will be using stop losses on those stock positions that we think would be very vulnerable should the market go lower than our research suggests. If our strategy is successful, you will be sufficiently invested when the market begins its recovery. Keep in mind that during the first year of a bull market, indexes typically advance 35% or more.

Over the next few quarters, we would not be surprised to see interest rates begin to rise as the current recession begins to unwind. This will provide an excellent time to add additional bonds to your portfolio and lock in the higher rates that we foresee. Given this possibility, we would urge any client who may be considering re-financing their mortgage to do so, given that today’s interest rate environment presents an excellent opportunity. If you need someone to assist with this, please contact us and we will be happy to provide you with a referral.

We have recently made an adjustment to your quarterly performance statements by replacing the Russell Composite and Russell Balanced Indexes with the Morgan Stanley World Stock Index and the Morgan Stanley World Balanced Index. These indexes are mush closer to our global investment style and serve as a better comparison.

It has been a tough environment in almost every way imaginable over the past 18 months. However, we now see a light at the end of the tunnel (and it is not an oncoming train). All of us here are looking forward to the better days that lie ahead and helping you participate in the upcoming financial market and economic recovery.

Sincerely,

James E. Demmert
Managing Partner