Quarterly Market Updates

MARKET UPDATE AND OUTLOOK : APRIL 2008

What’s new at J.P. King & Associates, Inc.?

As we did last quarter, we welcome a new Associate, Scott Horton, CFP^® to our team.  Scott comes to us from Fidelity Investments, where he spent the past twelve years managing over 550 high net worth client relationships exceeding $1 Billion in total assets.  A full description of his background is available on our website www.jpkingassociates.com.  We are very excited at the prospect of having Scott on our team.

We also note the departure of Leslie Biggers, our Director of Operations, after three and one half years.  Leslie’s duties will be handled by several staff members, including Nancy Gire, Jackie Walker and Jessica Parker.  We wish Leslie well and continued success in her financial services career.

Looking Back:  First Quarter 2008 (Q1’08) and trailing 12 months:

As you are most likely aware, Q1 ’08 was another down quarter for almost all stock fund categories, domestic and foreign, even worse than Q4 ’07.  In fact, the return of the S&P 500 Index at -9.45% was the worst quarter since the third quarter 2002.  Similarly, the trailing 12 month return of -5.08% was the worst since Q1 ’03.  The past quarter was negative for all size and style categories of U.S. stocks, from Small Growth, the worst at -14.45%, to Small Value, the best at -6.90%.  All sector funds were also negative with the exception of Precious Metals (+5.04%), as Gold hit a record high price of over $1,000/oz during the quarter before dropping back.  Foreign funds, including Emerging Markets, which have been enjoying record returns the past few years, were also down, despite gaining from the declining U.S. dollar.  All major regions, sizes and styles were down, with Pacific/Asia ex. Japan the worst at -20.66%, and Latin America the best at -4.35%.  The MSCI EAFE index of mature, larger foreign markets was down 8.91%.  The only other Equity Fund categories to show positive returns were Commodities (+9.61%) and, not surprisingly, Bear Market (+10.98%)

In spite of strong growth in Commodity prices, fixed income securities generally showed positive returns, and as was the case last quarter, investors showed a strong preference for high quality over anything with any perceived risk.  Governments were thus the best place to be, out-performing general/diversified bond funds at all maturity points.  Domestically, the highest return was the Inflation Protection category (TIPS), up 4.81%, followed closely by Long Governments, +4.39%.  The worst was Bank Loans -6.00%, followed by High Yield, -3.58%.  World Bonds did even better, +5.20%, thanks to the continuing depreciation of the U.S. Dollar against all our major trading partners’ currencies.  Municipal bonds showed continued weakness as rates did not follow Treasuries down, but rather rose, thus depressing prices, due to continuing concerns over liquidity and pricing.  What this means is that Munis are yielding as much, and in some maturities more, than equivalent Treasuries, making them a relative bargain, especially for high tax bracket investors.  Patient investors are likely to be rewarded over the next few years with tax-free income and modest price appreciation from present levels, with such income being more valuable in the likely event of rising marginal personal income tax rates in coming years.  Finally, yields on Money Market funds, both taxable and tax free, have fallen significantly from a year ago, as the Federal Reserve has cut rates by 3% since last summer.

As mentioned earlier, the only equity investments to show gains during Q1 ’08 were alternative asset classes:  Gold & Precious Metals, Commodities and Bear Market (short) strategies.  The Long/Short funds category was down 3.0%; less than the broad stock markets, but still negative.  Our largest holding in this category is Hussman Strategic Growth, which was up 0.13%, beating the benchmark for the quarter and the trailing 12 months (2.66% vs -0.86%).  He remains fully hedged.  Our other major holding, Rydex Absolute Return Strategies, was down 5.52% and is on our watch list.  We are monitoring some other alternatives in this category and may make a shift during the coming quarter.

Looking Ahead:  Second Quarter and remainder of 2008:

The “R” word (Recession) is being used more frequently by even government spokespeople, much less private economists, than six or even three months ago.  Regardless of whether the first two quarters of 2008 will meet the government’s statistical criteria of a Recession, economic activity has decidedly slowed to a crawl, at best, and will be sluggish for the rest of the year.  However, the trend should be reversing by late summer as the effects of Fed rate cuts, tax rebates, media spending around the election and Olympics, and record export activity contribute to a rise in consumer confidence and spending.  Stock markets usually anticipate economic events by 6 to 9 months, so even if the economy doesn’t turn up until Q1 ’09, I would expect the market to begin an upward trend sometime in the second half of 2008.

Of course, the above is not the only potential scenario.  There are those more pessimistic, projecting a stagnant economy well into 2009 and a deeper stock market decline between now and then.  Others see a quicker recovery starting later this quarter, with the U.S. stock market already having bottomed out in March and already in the next bull cycle.  No one can predict the future so I won’t try.  We will maintain a patient, long-term perspective that has served our clients well in the past, neither overreacting to short-term events nor ignoring longer term trends.  For now, that means continuing to hedge our exposure to stocks with interest bearing cash, other fixed income, and modest exposure to alternatives such as Hedge funds, Commodities and Long/Short funds.

James P. King, CFP^®
April 17, 2008