Economic Commentary

Preamble.

The older I get, the more I realize how precious time is. I have more responsibilities and seemingly less time to devote to each endeavor. I have less time to read and yet more things I need to read. In that spirit, I will attempt to make this and future quarterly reports brief and to the point and possibly eliminate the mid-quarter news update. My attempt to limit my discourse is not meant to limit our discourse with you. We encourage and enjoy our dialogue with each of our clients. If you have further questions at any time about your accounts or the financial markets, you should not hesitate to contact myself or your relationship manager at Bill Few Associates, Inc.

Summary of the Quarter.

The first quarter of the year got off to a bad start. Stock markets dropped as the credit crisis that started in the subprime lending market spread to other areas of the credit markets and affected balance sheets of many large financial institutions. As the quarter ended, the Federal Reserve and the Treasury Department helped to organize a forced merger of JP Morgan Chase Bank buying Bear Stearns (an investment bank that was nearing bankruptcy). This move created an element of calm in the interim and stock markets traded higher in the final days of March and the first few days of April.

In the broad stock markets, we had some quarterly returns that were more negative than we have experienced in some time. The S&P 500 (index of large US stocks) was down 9.4% for the quarter. Small stocks, as measured by the Russell 2000 Index, fell 9.9% for the quarter. International stocks of the larger developed countries, as measured by the MSCI EAFE Index, were down 9.5%. As typically happens in short-term market sell-offs, diversity within stock asset classes was not a big benefit. Just about all stock indexes fell and most fell nearly 10%.

Fixed income markets held up much better during the quarter. Bonds are supposed to provide, in general, a more stable and typically lower long-term return than stocks. An investor adds them to a balanced portfolio to offset some of the swings in stocks prices, such as in the past quarter. The highest credit quality bonds, like Treasuries, performed the best in the quarter. Lower credit quality offerings, like high yield bonds, produced negative returns, though less negative than stocks. Municipal bonds weakened slightly in the quarter and are now offering some of the best potential returns going forward based on their historical valuations and underlying fundamentals.

The lone area that performed well in the quarter was investments tied to commodities. As the dollar continued to weaken as a currency, many investors flocked to oil, gold and other commodities as a hedge against future inflation. Our structured commodity note and the commodity mutual funds we use were all up strongly in the quarter. However, commodity investments are a minor part of most diversified portfolios, so their positive performance was not enough to offset the negatives in the equity markets. The good news is that a balanced portfolio of stocks, bonds and commodities (depending upon the client’s investment objectives) fell less than the general price decline in the equity markets.

Looking Forward at 2008.

I have been a professional investor in the stock markets since 1986. I know all the statistics about long-term investing and the benefits of compounding. It takes an unusually good talk to get me “fired up” about investing, but I recently heard one. It was from one of the industry professionals who provide us with mutual fund and market information. This gentleman walked me through the worst performance years of a particular large-cap equity investment and then pointed out what the value of that same investment (reinvesting dividends) was ten years later. The different time periods we covered included issues similar to those we face now: political change, war, commodity shortages, rising prices, etc. The bottom line is that ten years later, in almost every instance, the original investment more than doubled and in some cases more than tripled in value, leaving the investor substantially better off having been fully invested for a decade. His talk reminded me why difficult markets, although painful for all of us in the short term, are great for the long-term investor.

As long as we remain a capitalist-based democracy, that is the way the markets work. Occasional painful sell-offs are not reasons to get out of the financial markets, but reasons to get into the markets! We may have talked ourselves into a recession and that may have real consequences in our budgeting and spending, but it should not alter our long-term investment strategy. What we are going through now is unique to us, but no different than many other adjustments our economy has weathered over the past 80 plus years of modern financial history. The key to our collective financial prosperity is viewing this economic dislocation as an investment opportunity. The response of the financial markets over the past two weeks is evidence that some investors are starting to view the current sell-off as a buying opportunity, as do we.

I think the second half of 2008 will present more challenges, but it should also be a time when financial markets begin to receive some good news. First, our current political uncertainty will be resolved in November and we will have a new presidential administration for the next four years. Regardless of who wins, the financial markets will adjust and adapt to take advantage of the new president and their priorities. Secondly, current demand for many of the commodities that are soaring in price will fall as the demand adjusts downward. The more the demand for gas, copper and building materials lessens, the faster prices will fall. This will eventually help restart demand. This is a virtuous cycle that happens all the time in vibrant, growing economies. Finally, the weakening of the US dollar seems to be stabilizing based on aggressive action by the Fed and others to help repair our credit markets. A stable to stronger dollar in the second half of 2008 could also help lead our domestic financial markets higher.

I am not sure I was quite as brief as I had intended to be, but I wanted to make clear that this spring should be about staying committed to your investment plan without worrying too much about our most recent economic winter. Thanks, Mike.

Data sources: American Funds, Bloomberg, FactSet, Ned Davis Research and The Wall Street Journal.