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Client
Communication Briefings
Much good has happened since I last corresponded. We have launched the War on
Terrorism with the successful air strikes over
Stocks have staged a strong rally in the past two weeks that is quite
encouraging. We still have a long way to go, but at least we are moving in
the right direction. However, we have seen recent stock rallies run out of
steam and prices slide down to new lows. The latest happened this summer with
the Dow rising from the low 9000 at the end of the first quarter, recovering
over 15%, approaching 11,400 only to slide back down to 9,600 before the
terrorist act. The new post-attack low was just over 8,000 before recovering
to Friday’s close of 9,344.
What can we expect going forward? Most experts are now predicting a V-shaped
recovery of both the stock market and within six months, the economy. This is
due to the stimulus package that the Federal Reserve has put in place with
lower interest rates and increased money supply along with the increased
Government spending programs projected to exceed $100 billion.
How realistic is this? History supports these conclusions quite strongly. As
I had reported earlier, after the initial shock and sell off from an event
such as September 11, markets stabilize and recover within a month or two
followed by a strong increase in economic growth as the Government responds
with spending. This may turn out to be one of the best buying opportunities
for stocks that we have seen in a long time.
What about bonds? Bonds have delivered great returns over the past two years
as investors have pulled money from stocks and purchased bonds. Interest rate
cuts by the Federal Reserve also drove up bond prices.
With rates this low, now is not the time to rush into bonds. Current rates on
ten-year U.S. Treasuries are around 4-˝%. As the economy starts to recover
and all the Government spending floods the markets with cash, inflationary
fears will start pushing interest rates up. Remember, bond prices move
inversely to interest rates, meaning the total return on bonds will drop.
That is the risk of investing in bonds today. Sticking to short-term bonds –
less than two years or money market funds, can reduce this risk. The bad news
is that rates for those investments are less than three percent.
The answer now as it has always been – diversification. Your portfolio
allocation between stocks, bonds and cash should be determined by your
investment objectives, time horizon and risk tolerance. If you have any
changes in these, please give me a call. I review your accounts keeping in
mind your needs for cash, balanced against the objectives of growth and
future income. It is more important than ever that I am kept informed of any
changes in your circumstances.
Do not hesitate to call with any questions, concerns or just to say hi. I
will keep you posted as events unfold. Keep
the Faith, Michael
Haubrich |