Last Quarter Round-Up
And so ends a volatile last quarter to a volatile year. The S&P 500 was down -3.82% for the quarter, but finished the year up at +3.53%. Unfortunately, the market volatility continues and I don't expect it to let up until we see a clearer economic direction. It seems clear to me that the economy is slowing down, which by itself can be dealt with... it is part of the natural business cycle. However, the ongoing concern over credit and the associated uncertainty of many large financial institutions is exacerbating the situation. I still maintain that the sub-prime credit issues have been largely over-dramatized and that the coming slowdown won't result in a full-blown recession. Our equity strategy last quarter was to favor large caps and growth while underweighting small caps and value. For fixed income, our strategy favored inflation-protected and long bonds while underweighting short bonds. Last quarter was a great example of avoiding over-valued asset classes. Quarterly asset class results are: Large Cap -3.47%; Small Cap -6.08%; Growth -2.84%; Value -6.70%; Inflation-protected bonds +3.69%; Long bonds +4.87%; Short Bonds +1.14% (see Notes)
Global Economic Outlook Our equity strategy this quarter will continue to favor large caps and growth. The continuation of low and possibly even further reduced interest rates should help growth-oriented investments. We expect small caps to struggle as the tighter credit market potentially limits their access to funding. Our fixed income strategy will also remain unchanged, over-weighting inflation-protected and long bonds, while under-weighting hi-yield and short bonds. As I've mentioned numerous times before, I worry that inflation is lurking in the background and recent economic reports only support this idea. Although personal income is up, the nagging sting of inflation resulted in consumers spending more than they earned in November. That process will likely continue and provide support to our long bond positions. With each new report, the uncertainty of our economy deepens... and the markets respond with dramatic volatility. Unfortunately, I see no let-up in this volatility until a clearer economic picture emerges. I don't expect dramatic news on the housing front during the quarter, but I expect personal finance issues such as foreclosures and bankruptcies to surface as we approach tax season.
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Notes: Asset class & style returns are based on the price-only performance of ETF's & ETF blends with similar respective focus. Asset class and Style results do not reflect the performance of Barron Financial Group, LLP's advisory accounts. Advisory accounts may not contain these investment strategies and may contain investment strategies not described here. Advisory services include asset management fees that are not reflected in these results. Please contact Barron Financial Group, LLP for more information about specific asset class, style or portfolio returns.
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