Quarterly Market Updates

MARKET UPDATE AND OUTLOOK : October 2009

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

We are pleased to host our third client education event this year on Wednesday, October 28th, 2009 at Round Hill Country Club. The topic will be Social Security and Medicare. We will discuss how to get the most from Social Security, including some lesser known strategies. We hope to see you there at 4:00pm and please feel free to bring a guest.

This past quarter we welcomed three new clients to the firm. Each of our new clients was referred by an existing client. Thank you for thinking of us and referring your friends and family. We appreciate this reflection of the confidence and trust you place with us.

Looking Back: Q3 2009

It’s hard to believe but fall is here, with school back in session and the holidays just around the corner. The summer months seemed to fly by as they always do. And it helped that we experienced another positive quarter in the Markets. U.S. stocks were up 16.46% for the quarter, as represented by the Vanguard Total Stock Market Index. The S&P 500 index marked September 30th by logging in the two best back-to-back quarters since 1975. Nevertheless, it still has been a terrible decade for stocks. The S&P 500 index would need to climb 39% just to break even for the decade!

Foreign stocks continued to outperform U.S. stocks in the third quarter, with the Vanguard Total International Stock Index returning 19.67% for the quarter, bringing the year-to-date return to 32.53%. We believe that foreign stocks, especially emerging markets, have greater growth potential than U.S. stocks, albeit with greater volatility as well. Our portfolios reflect this belief, as we maintain higher foreign stock exposure relative to U.S. stocks than most traditional asset allocation models.

The U.S. bond market (as represented by the Vanguard Total Bond Market Index Fund) was up 3.67% for the quarter, bringing the year-to-date performance to 5.86%. We continue to see good opportunities in fixed income. Two of the bond funds we hold in several of our model portfolios did especially well: Loomis Sayles Bond and Templeton Global Bond. These funds were up approximately 10% and 5% respectively for the quarter. When you think of bonds, you don’t usually think of that kind of performance. Our strategy of diversification across multiple types of bonds strengthens the safety and may also enhance the returns of our model portfolios. We closely monitor the fixed income markets and seek to balance the various types of bonds appropriately in each of our models.

In the alternative asset class the quarter was generally flat to positive. Gold did quite well however, and was up approximately 7% for the quarter. This was in large part because the U.S. dollar declined versus a basket of major foreign currencies. Commodities were up approximately 3% for the quarter, as represented by the Dow Jones AIG Commodity Index. Our hedged equity, long-short, and arbitrage funds (Hussman Strategic Growth, Caldwell & Orkin Market Opportunity, and Merger Fund) returned approximately -0.31%, -2.48% and 1.73% for the quarter, respectively. Given the robust stock returns this quarter, it is not surprising that these positions were relatively flat to slightly negative. Actually, we would be more concerned if these funds had generated returns closer to stocks. As we like to say, “If everything in your portfolio is going up, then you don’t have a portfolio – you have a bet”. We remain very comfortable with these positions; they are doing their job in the portfolios.

In the multi-asset category, two of the more growth-oriented funds, First Eagle Global and IVA Worldwide, both performed very well, gaining approximately 13% and 11% respectively. Our more conservative fund in this area, Greenspring Fund, returned a respectable 3.8%. In September, Scott was privileged to have dinner with fund managers from First Eagle Global and IVA Worldwide at the Schwab Impact Advisor Conference in San Diego. These meetings provided helpful insight and reinforced our understanding of the underlying methodologies each team uses in their portfolio selection. We continue to have confidence in their approaches and how they fit into our model portfolios.

Overall we are pleased with the portfolio performance of our various models in this rising market. For this quarter our most conservative model returned approximately 5 percent, or close to 1/3 of the stock market return, with significantly less risk, while our most aggressive model returned approximately 14.5% (or close to the equivalent of the U.S. stock market), but with measurably less risk. Although we are pleased with these results, we continue to be especially focused on performance should the markets reverse course and go down. We believe the changes we have implemented during the past ten months have improved downside protection for when the markets decline. Anytime we discuss portfolio returns it’s important to point out that past performance is not a guarantee of future results.

Looking forward: Q4 and Beyond

We’ve come a long way in a short amount of time. Through September 30th the U.S. stock market is up approximately 57% since the March 9th lows, as measured by the S&P 500 Index. Many pundits predicted a seasonal pullback in September which didn’t happen. Behavioral finance teaches us that when everyone is singing the markets’ praises, it’s a time to be more cautious, and when everyone is lamenting the markets’ woes, it’s a time to be bolder. In this moment, sentiment appears evenly divided in commentators’ opinions. Many think we are in a cyclical bull market with another 20% rise ahead in the year to come. Many others believe these past six months have been nothing more than a bear market rally and that the next big move will likely be down. The one thing we know for certain is that the future is unpredictable. There continue to be significant economic risks outstanding. Some of these risks include the fragility of the housing recovery, sustained weakness in the job market, increased government regulation and taxation, and the questionable ability of the Fed and Treasury to unwind the significant liquidity they have injected into the system. Given the sharp run-up in stock prices, we are somewhat cautious. Accordingly, we continue to monitor and adjust our investment models, as we study the markets and the economy, and make the necessary changes in order to maintain the appropriate balance between potential return and risk for each of our client portfolios. We thank you again for your ongoing trust and patronage.

Scott Horton, CFP®, James P. King, CFP®
October 9, 2009