Quarterly Market Updates

MARKET UPDATE AND OUTLOOK : JULY 2008

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

After welcoming two new professional associates, Nancy Gire and Scott Horton, during the past six months, we have no new personnel announcements, and look forward to integrating the many talents of these new team members with those of the rest of us. We welcome Scott’s and Nancy’s clients who have become clients of our firm over the past three months. We recently signed a new lease for five years in our current offices, with an option to expand into adjacent space, as needed.

We are in a growth mode and welcome referrals from existing clients and friends as our primary source of new clients. Thank you in advance for mentioning us to your friends and colleagues. The easiest way for them to learn about us is to send them to our website, www.jpkingassociates.com. We are in the process of upgrading our site, which should be completed by early August. We invite you to visit and let us know what you think of the changes.

Looking Back: Second Quarter, 2008 (Q2’08) and trailing twelve months

After a modest rally during April and May, both U.S. and Foreign stocks fell significantly in June, as worries about the credit markets, particularly subprime mortgages, coupled with the dramatic rise in energy and food prices, reawakened fears of a global economic slow down. For the quarter, returns for most stock indexes and categories ranged from down somewhat, (Large Value, -4.04%; Large Blend, -1.60%) to up somewhat (Mid Growth, +4.31%; Small Growth, +3.19%). Category average performances generally beat relevant Indexes, with the S&P 500 Index down 2.75%, the Wilshire 5000 Index down 1.48% and the Russell 2000 Index (Small companies), +0.58%. These results left all U.S. broad stock categories down so far in 2008, from -7.93% for Mid Blend (Best) to -12.05% for Large Value (Worst) and with generally worse results for the trailing twelve months, with Mid Growth the best (-6.53%) and Small Value (-19.82%) the worst . Generally, Growth has been outperforming Blend, with Value lagging quite a bit, while Mid has led Small with Large trailing so far in 2008.

Some sectors managed positive returns. Leading the way was Natural Resources, up 19.42% and 16.61% for 3 and 6 months, mainly due to dramatic increases in energy-related companies. Precious Metals had a more modest quarter, +3.64%, bringing its Year-to-Date (YTD) gain to 8.89%. Both Utilities (+6.37%) and Technology (+2.85%) managed gains for the quarter, though their YTD numbers remain negative (-4.36% and -13.78% respectively). The NAREIT Index (Real Estate Investment Trusts) was down 4.93% for the quarter after a slightly positive Q1, bringing the YTD results to -3.60%.

Foreign stocks, which outperformed U.S. for five years (2003-2007), have generally fallen as much as U.S. stocks so far in 2008, and even more in some regions. The MSCI EAFE index was down 2.25% for Q2 and 10.96% so far in 2008, vs. -1.48% and -10.95% respectively for the Wilshire 5000 Index of U.S. stocks. Asia was down 1.82% and 12.59% for the 3 and 6 month periods, Europe was -2.10% and -11.10%, while Latin America was actually up 12.63% and 7.71% during these periods. Despite help from a depreciating U.S. Dollar, the Foreign Indexes and categories fell significantly into negative territory.

Fixed Income results generally reversed their somewhat positive Q1 results, especially longer maturities, as interest rates backed up during the quarter, especially for U.S. governments. Credit spreads narrowed somewhat during Q2 so that High Yield Bonds had the best returns, up 1.49%, while Long Governments were the lowest at -2.87%. Municipals (Tax-Free) categories were all modestly positive. Returns on virtually all Fixed Income Categories were thus in a fairly narrow range from -2.70% (High Yield Munis) to +0.94% (Long Governments) for the first half of the year, with the exception of Inflation Protection Bonds (TIPS), which, though down 0.63% for Q2, returned +4.13% YTD due to a very strong Q1 (+4.81%). Money Market Funds delivered modest returns again, as they did during Q1, with Taxable up 0.54% (1.09% YTD) and Tax-Free up 0.47% (0.85% YTD). These translate to annualized rates of 2.19% and 1.71%, respectively.

Finally, the area of Alternative Investments: namely Commodities, Hedge-Like Funds (Long/Short, Bear Market), and Gold & Precious Metals, showed mixed results during the period. Commodities enjoyed another very strong quarter, with the Dow Jones-AIG Commodity Index up another 16.08%, bringing its YTD gain to 27.22%. The iShares Comex Gold Trust was up 0.98% for the quarter and 10.71% YTD as the price of Gold finished the quarter only slightly higher than at the beginning, after a big gain during Q1. The Long/Short category average return was slightly positive, +0.29%, though still slightly negative YTD at -2.67%. Our largest holding in this category, Hussman Strategic Growth Fund (HSGFX) returned +0.90%, 1.03% YTD. Bear Market Funds were actually negative for the quarter (-1.31%), though still significantly positive YTD (+9.47%), not surprisingly.

Looking Ahead: Third Quarter 2008 and Beyond

Recently, I heard a commentator use the word “capitulation” in reference to market activity. At some point in every bear market, officially designated when prices decline by at least 20% from their previous peak, investors who have been reluctant to sell finally “capitulate” and give in to the fear/flight emotion. This traditionally marks the end of a bear market and the beginning of a recovery. The intense selling early this month that led to these comments may yet prove to have marked the bottom of this cycle, but we won’t know if that’s the case for some time. That’s because “bear rallies” as they are called (short-term rallies in the middle of a longer term bear cycle) are common and often indistinguishable from a true beginning of a new bull market. For now, despite the rebound last week (July 16 & 17), I remain unconvinced that the full extent of damage done to the economy by the credit/housing crisis and economic slowdown has been fully reflected in today’s securities prices. Because we focus on the long term, we remain substantially invested in the appropriate allocation for each client. The next several months are likely to resemble recent ones as the economy continues to struggle and the financial markets attempt to make sense of often conflicting signals.

James P. King, CFP^®
July 21, 2008