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Greetings!

 
 
We'll be sending out the quarter-end commentary in a few weeks, but given recent market weakness, I wanted to send out a quick note. Over the last 5 weeks, the market as measured by the S&P 500 is down roughly 10%, and it is down roughly 18% from its peak of October 2007.

This isn't the first bout of market weakness we've seen this year, as the first quarter witnessed a sustained downturn as well. However, the apparent causes of the two downturns differ, and understanding those causes are key to setting expectations moving forward. During the first quarter, it became apparent that the credit markets - primarily those portions related to housing - were due for a correction. However, at the time, it wasn't clear just how widespread the reverberations would be. Some even feared a systemic collapse of the credit markets. Fear of this unknown led to sharp market volatility, and the increased volatility did not subside until the Fed intervened.

After the Fed intervention, the markets rallied and investors seemed to overlook the likelihood that the U.S. was still facing an economic slowdown and possibly a recession. Over the last several weeks, that realization seems to have taken hold.

Thus, the latest round of weakness appears to be driven less by concerns of a collapse in the financial markets, and more by common concerns that include inflation, deteriorating corporate profits and further weakening in the economy. While each of these concerns are legitimate, they are issues we've faced before and with the possible exception of inflation, none comes as a real surprise for reasons we've outlined in previous newsletters.

It will take time for the consumer to retrench, and by extension it will take time for the economy to return to its standard growth rate and for corporate profits to rebound. As for inflation, much of it is driven by surging energy costs, and consumption patterns typically take time to change. However, if - as appears likely - high energy costs persist, consumption patterns will change over time and with it inflationary pressures driven by spiking energy prices should decrease as well. This will all take time to unfold, and in the interim, we would not be at all surprised to see further market weakness.

During times like these, we counsel patience. Nearly all of our clients have a diversified portfolio that should reduce the impact of market downturns. Further, for those clients that depend on their portfolio for cash needs, we've generally set aside enough in cash and conservative fixed income investments to tide them through market downturns. Lastly, each portfolio has some exposure to actively managed mutual funds, and history has shown that it is times like these during which savvy managers find the bargains that provide for solid long-term returns.

We have taken a number of steps to help portfolios weather the current market weakness. As I mentioned at the outset, I'll be sending out our quarterly commentary in the next few weeks, and in it I'll explore each of the factors in current market weakness in more detail. In the meantime, if you have any questions or if you'd just like to chat, don't hesitate to call.

 

 
Best regards,
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