Derailed

- 2006 2nd Quarter


In our 1st Quarter 2006 Market Commentary, I expressed some concern over what I felt could happen in the market, and unfortunately many of those concerns came to fruition during the 2nd quarter of this year.  On the positive side, the market did not fall or crash, but we came off the track just a bit.  For the 2nd Quarter the S&P 500 was down 1.44%, making our year-to-date number a modest 2.71% through June 30th.

The purpose of our quarterly Market Commentary is to summarize the events that have taken place recently in the market and to give some thoughts and ideas on what may happen in the near and distant future.  Many of the opinions and analysis that go into the Commentary come from our relationship with Dr. Ken Mayland, who was rated by the Wall Street Journal as the “Top Economist of the Year in 2004”.  In addition to the Wall Street ranking, Money Magazine once listed Ken as “The Sexiest Economist Alive”.  I am quite certain Ken earned this ranking based on his accuracy of market predictions, and not on his sex appeal.

As we dive into to what happened during the 2nd Quarter, in many ways I feel like a broken record.  During the Quarter, the Fed raised interest rates for a 16th & 17th consecutive time period.  The 16th increase was widely expected, but for some time, the 17th was in doubt.  As I have stated in the past, this is the straw that continues to stir the market, and realistically we cannot expect much from the market during a time period of rapidly increasing interest rates.  The good news is that even after 17 consecutive interest rate increases, the market and economy are still showing positive signs of growth.  The bad news is that for the 1st time in awhile, the growth numbers are slowing down and the growth projections are not as strong as they have been.

While the Fed is one of the biggest factors in the market, we continue to have a lot of other "stuff" going on.  The most painful thing that affects us all is Energy and in our day-to-day lives that means the price of a gallon of gas.  At the time of this writing, we have crossed the $3.00 a gallon number, and while the price has not been increasing as rapidly as before, it is clearly on its way up. 

Those are some of the negative events of the 2nd Quarter.  Now, let me tell you my expectations for the 3rd and 4th Quarters of 2006.  First the 3rd Quarter... unfortunately I think we are going to see more of what we saw in the 2nd quarter, and realistically it will probably be even a little worse.  While the growth numbers of the market have slowed, they have not slowed enough to stop the Fed – yet.  So it is our thought that the Fed will raise interest rates again for the 18th consecutive time when they meet on August 8th.  Also on the horizon, a changing of the guards... the Democrats are coming.  With the low approval ratings President Bush and his staff continue to receive, we are anticipating a dramatic shift for the Congressional elections.  The timing of these events could not be worse.  Historically, the summer months (and August in particular) are the worst time for the market each year.  Our overall 3rd quarter recommendation is to be patient, and if you are choosing your investments at this time, be selective in what you choose.  We are approaching a market crossroads where bonds will go from being as out of favor as possible, to potentially being the "in" investment again.  As we have always tried to teach, this is a marathon not a sprint.  The marathon we all are working for is Retirement.  The history of the market includes ups and downs, but the overall market trend has been up averaging almost 10.5% over the last 50 years.

While we preach patience and being selective for the 3rd quarter, we are extremely optimistic for the 4th quarter.  Why you may ask?  We feel all but certain that the Fed will make August 8th their last increase.  We also will be able to put the Congressional elections behind us and move forward.  Whatever the results may be, they will be known, and behind us, which is the best possible thing for the market.  Also, while the 3rd quarter and summer months are historically the worst quarter, the 4th quarter has historically been the best quarter of the year, and I am not just talking about the good eating at Thanksgiving.  We have had many years in the past where the 4th quarter can make the year, and I feel there is a strong chance of that occurring again this year.

As we look at things for the remainder of 2006, I would stress the fundamentals of investing for Retirement.  Understand the timeframe in which you are investing and diversify your assets accordingly.  My advice would be drastically different from someone who is investing for 2 years versus someone investing for 15 years.  Also, you need to measure the risk versus the return you seek.  If you are seeking a high return, and are willing to take on the risk associated with it, then in good markets, you will be successful.  If you want a more conservative approach to your investment, then you can reduce your risk.  By reducing your risk, in good markets your return will be good, but I doubt that it will be the top return out there.  I believe one of the key components to successful Retirement Planning is to have your goals figured out, and then to be consistent over time and through all market conditions.

As we look at 2006, and beyond, we must always expect the unexpected.  While we can read and study investments all day long, I always caution people to be prepared.  In the last 5 years we have experienced several catastrophic events including 9/11, a Tsunami, and Hurricane Katrina.  Your retirement and life goals to a certain extent should be built taking these types of events into consideration.  For the last 12-18 months, the international markets have outperformed our own domestic markets.  All expectations are that this should continue for the next 1 to 2 years.  While I agree with this, we must be very aware of Geo-Political issues that threaten us daily.  The ones that come to mind are North Korea and the ongoing sagas with both Iran and Iraq.

It is and has been the intent of Pension Advisors and AdviseMe!® to do everything within our power to help put participants in the best possible position to face Retirement.  In running AdviseMe!®, we have always had a plan, and have had good success in sticking to this plan.  In writing this commentary, I often get concerned that people get too excited when things are good, and very down when times are bad.  The reality is that right now we are not doing badly, nor are we doing great; we are merely chugging along through what has been a crazy market.

The style with which AdviseMe!® has been built has been to reduce and control risk in the Model Portfolios.  In our testing, we have found that when the markets are doing well, we too will do well, and when the markets are doing poorly, we will shine.  During the 2nd quarter, while things were down, we consistently have outperformed the respective benchmarks while maintaining much less risk.

We have continually stressed at Pension Advisors that we are not trying to make our clients into investment experts or Retirement experts.   If there is anything that we can do to help you achieve your retirement or investment goals, please do not hesitate to contact us.  We appreciate your continued support of AdviseMe!®, and look forward to working with you in the future.


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