First Quarter 2008 Market Review

Financial markets were extremely unsettled during the first quarter. Equities declined significantly across all market capitalizations and sectors both in U.S. and foreign markets. Gold funds and those shorting stocks (i.e., betting on stock prices declining) were the only equity fund categories with positive returns for the quarter. The Fed was in full crisis management mode and continued to aggressively lower fed funds and its discount rates. Global bonds provided mixed to positive returns depending on sector and credit quality. Amid few signs of a bottom in housing and little, if any, abatement of the credit crisis, few economists doubt that the U.S. economy is in or near a recession. Further complicating matters, oil prices continued up, the U.S. dollar weakened further, 
and there were signs of accelerating inflation.

Equities Review

Global equity markets were extremely volatile over the first quarter of 2008 and returns were the lowest in 51/2 years. The decline was widespread. The S&P 500 Index of large cap stocks declined 9.5% while the Russell 2000 Index of small cap stocks fell 9.9%. Value indices outperformed their growth counterparts, thus breaking growth’s string of four consecutive outperforming quarters. The Russell 3000® Growth Index declined 10.4%, while the Russell 3000® Value Index dropped 8.6%. All sectors were down, with technology, communications, and financials returning -16.0%, -19.0% and -12.1%, respectively. The best performing sectors were consumer staples, materials, and industrials, which declined the least, at -2.5%, -3.3% and -5.4%, respectively. Real estate and natural resources stocks returned -.9% and -2.8%, respectively.

Foreign stock markets exhibited similar volatility with returns also down across all sectors. The MSCI EAFE Index of foreign developed markets returned -8.9% while the average diversified international equity fund returned -9.2% in U.S. dollars. Foreign markets were down even more when measured in local currencies and suffered losses considerably worse than in the U.S. However, the weakness in the U.S. dollar, down 4.1% during the quarter versus 19 currencies tracked by the J.P. Morgan Dollar Index, boosted returns for U.S.-based investors. Emerging economies faltered as credit availability became scarce; the MSCI Emerging Markets Index returned -10.9% in U.S. dollars for the period. 

Fixed Income Review

Bonds outperformed equities but returns varied significantly across sectors and quality. U.S. interest rates fell all along the yield curve, particularly on the shorter end of the curve. Yield spreads against safe U.S. treasuries increased dramatically as investors curtailed risk. High quality correlated with good returns and vice-versa for lower rated bonds. U.S. treasuries, agencies, and mortgage backed securities generated positive total returns while asset-backed securities and high-yield corporate bonds garnered negative returns, albeit still better than equities. The Lehman Brothers U.S. Aggregate Index returned 2.2% for the quarter. Municipal bonds declined in February due to credit quality concerns about bond insurers but rebounded in March, ending the quarter about where they started in terms of total return. The combination of falling yields and U.S. Dollar weakness helped bonds of foreign developed countries to very solid returns; the Citigroup Non-U.S. World Government Bond Index returned 10.9% in U.S. dollars for the quarter. Emerging market bonds were hurt by slowing economic growth and the average emerging markets bond fund returned -.1% despite significant currency gains for U.S. investors.