Quarterly Market Updates

MARKET UPDATE AND OUTLOOK : July 2009

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

We held our second Client Education Event on June 16, 2009 at Round Hill Country Club. The topic was “A View from Washington” presented by Mike Townsend of Charles Schwab & Co. We had nearly 50 clients and guests in attendance and the evaluations indicated enthusiastic appreciation for the quality of the program. We are planning another Education Event for the fall, probably in early October. You will receive an invitation later in the summer with specifics.

Also, we welcomed six new clients to the firm during the quarter. We thank all of you for the referrals of family and friends and welcome more in the future. We feel a referral is the greatest acknowledgement of service well done. Thank you for keeping us in mind for when the time is right.

Looking Back: Q2 2009 and trailing 12 months:

Last quarter, the first positive one since Q3 2007, was notable for the rebound in stocks that actually began during the previous quarter (3/10/09) and peaked in mid June (6/12/09), an increase of nearly 44% from trough to peak. Yet this represented only an 18.9% retracement of the 56.7% drop from the previous peak in October, 2007 to the trough on March 9, 2009. In other words, the U.S. stock market still has a long way to go to get back to the previous peak. For the quarter, the Vanguard Total Stock Index Fund gained 16.96%, bringing the year-to-date return to 4.40%. The trailing 12 month return was a painful -26.22%, reflecting the horrendous second half of 2008. Three, five and even ten year returns were still negative for U.S. stocks, and it will take several quarters of positive results to raise those averages into positive territory. Still, it was a relief to see positive results after a year and a half of increasingly negative numbers.

Foreign stocks managed an even more dramatic rebound with the Vanguard Total International Stock Index Fund gaining 27.26% for the quarter, bringing the year-to-date return to +10.75%. Because the decline in International stocks during the second half of 2008 was even more pronounced than for U.S. stocks, the 12 month return for this fund was worse than for the U.S. fund at -30.51%. The three year figure was still negative (-6.94%), but the five and ten year numbers managed to fall into positive space at 3.95% and 2.18% respectively. We continue to think there is more growth potential in foreign stocks, especially emerging markets, than U.S., though likely with greater volatility as well.

Diversified bonds, as represented by the Vanguard Total Bond Market Index Fund, continued their modest but steady progress, returning 1.75% for the quarter, 2.11% year-to-date and 6.14% for the trailing 12 months. This masks the considerable variation, and in some cases volatility, between different types of bonds: government, corporate, foreign, indexed, convertible, municipal, zero coupon, and distressed, to name some but not all. Still, for the discerning investor, we believe the credit markets continue to offer excellent opportunities on a risk adjusted basis.

Regarding alternative asset classes, Q2 was generally positive as well. Commodities were up about 12.4% for the quarter and 5.5% so far in 2009 (Dow Jones AIG Commodity Index), driven mainly by rising energy, especially oil prices. Gold, by contrast, was only up 1%, though the year-to-date return was still a competitive 5.4.%. Our Hedged Equity fund, Hussman Strategic Growth, returned -1.22% for the quarter, but still returned a respectable 6.21% for the year-to-date and -4.3% for the trailing 12 months.

Looking forward: Q3 2009 and Beyond:

Much has been made by the Administration and others of the “green shoots” that appeared to spring up during Q2: a slowing of the rate of decline in the economy (home foreclosures, new unemployment claims, a less-than-originally-reported contraction in Q1 GDP, etc.) and stabilizing of consumer spending. No doubt this spurred the stock market rebound. As much as we would all welcome an economic turn-around sooner rather than later, we just don’t see it. We take the view of economists and analysts such as Gary Shilling, Bill Gross and John Hussman, who all foresee at least a year of tough economic times before a sustained recovery can take hold. The mortgage mess is far from over, with another round of resets, this time Alt-A and interest only loans, not sub-prime, due to begin later this year, and unemployment continuing to be a drag until at least mid-2010. The “new normal” growth that Bill Gross describes, 2.0% vs. the 3.6% annually that we enjoyed from 1982-2007, means just that: slower growth, higher unemployment and lower living standards.

The implications for the financial markets are no less serious: a continuation of relatively high volatility (though not to the degree we experienced last fall), lower earnings, higher risk premiums demanded by credit investors (bondholders), more governmental intervention both directly, through Federal Reserve and Treasury actions, and via increased regulation, and both deflation potential (near term) and inflation (longer term). We have had to adapt our strategies accordingly, becoming more tactical in our approach, monitoring results more frequently, and rebalancing to counter the higher volatility. Later this summer, we expect to have fully implemented these changes to all clients accounts, with a few exceptions. We have adjusted our portfolio models considerably over the past nine months to deal with the “new normal.” You will soon be receiving an updated description of your portfolio holdings and will be asked to confirm that each account is being managed in accordance with your objectives. Please pay close attention to this communication when you receive it and respond at your earliest convenience.

James P. King, CFP®
July 8, 2009