The Prudent Investor
By Gus Krafve
January 18th, 2008
If someone just read the headlines, they probably would have thought 2007 was a bad year for stocks. Given the turmoil in sub-prime and the credit markets, it was a bad year for certain sectors like Financials and Consumer Discretionary. However, the three major U.S. stock market indices and numerous International indexes posted gains for 2007. Except for the high yield sector, bonds also had a solid year.
What will likely affect the markets in 2008?
The Fed. Currently, the futures markets have priced in a 100% chance the Fed will cut the Funds rate 0.50% in the next 6 months. Fed rate cuts are typically bullish for stocks. Since 1921, the Dow Jones Industrial Average is up 12.15% six months after the second rate cut in Fed easing cycles and up 22.58% one year after the second rate cut. The only years the market wasn’t up during a Fed easing cycle was 1929 and 2001. In 2007, the Fed cut rates three times, reducing the Fed funds rate from 5.25% to 4.25%.
The Election. There is currently a 37% chance, according to Intrade, that a Republican will win the election on 2008. If we look at data going back to 1888, when the incumbent party loses, the market is up on average 1.6% in an election year. On average, the market is up 8.4% during election years. The individual sectors that will likely have the highest stake in the outcome of the election are: Industrials/Defense, Energy, and Health Care.
The Financial Sector. This sector experienced one of its worst years in decades due in large part to losses from the sub-prime meltdown. Losses are in the billions of dollars and are likely to increase. Many companies in this sector have begun reducing employees. These issues will impact the sector in 2008, but how they ripple through the economy will impact the market as a whole.
2007 was an instructional year about the prudence of diversification, and the returns highlighted above illustrate why Trust Company of the Ozarks’ investment discipline emphasizes diversification in its clients’ portfolios. As always, we sincerely appreciate the trust and confidence which you have placed in us and look forward to working with and managing your portfolio in 2008.
