Market on the Brink

- 2006 1st Quarter

As we have just ended the 1st Quarter for 2006, from an investment standpoint, things appear very good.  We often hear in a movie or read in a novel, “things are often not as they appear”.  As we head into the summer months, the market is facing a crossroad that it has not experienced in some time.  This crossroad could put us, as consumers, in a tough situation.  On one hand, the market could continue moving upward for a strong 2006 leading us with good momentum well into 2007.  On the other hand, if the Fed raises interest rates too far, we could find ourselves in a situation similar to late 2000, where we fell into a recession.  Clearly, we are at “crunch time”, and as consumers we are facing a “Market on the Brink.”

The purpose of this Commentary is to summarize what has taken place in the market and to give some thoughts on what may happen in the near, and not so near, 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”.

As we take a step back and look at the market, the greatest factor affecting it appears to be the Federal Reserve continuously raising interest rates.  To date, the Fed has raised interest rates during 16 consecutive sessions.  While we have been experiencing a strong market and economy the past few years, the prevailing thought has been that when Fed steps aside and stops raising interest rates, the market will surge ahead similar to 1995.  This has been our story and we have been sticking to it.  We first expected the Fed to step aside late last summer, then we reconsidered and pushed the expected time frame to fall, 2005.  We then looked to early 2006 and now are hoping that the Fed will step aside after this latest increase.  Based on this uncertainty, much of the market optimism has been replaced with fear and experts are concerned that the Fed may go too far, similar to 2000, where they raised the interest rates to unprecedented levels and the market fell into a recession.

While the straw that stirs the market at this time is clearly the Fed and the interest rates, there are several other factors to consider.  The first is that 2006 is a major Congressional election year.   With the low approval rating of President Bush, many expect a significant shakeup to take place within Congress.  Historically, when significant changes take place at any level, the results are unkind to the market.  Another significant and ongoing saga is the increasing energy prices.  While we enjoyed a relatively mild winter, warm winters often lead to warm (hot) summers.  Unfortunately, few people realize that over 10% of the refineries were damaged in Hurricane Katrina and never returned to operational status.  The mild winter nationally helped conceal many of the problems that occurred as a result of Katrina.  We are in the midst of a warm spring  (temperatures have already hit the high 90’s in southern States) and energy prices are on the rise.  The price for a barrel of oil recently hit an all-time high of $75, but has slightly dipped back.  Consumers are getting frustrated as gas nears the $3.00/gallon price; the reality is that by late summer we may be looking at $4.00/gallon.

In addition, we need to remember that there is always a threat of terrorism and this would impact our market and economy.  Further, we are still struggling to recover from the last two hurricane seasons and it’s uncertain what weather-related catastrophes await us in 2006.

It is not the intent of this Commentary to write a “doom and gloom” forecast for the market and the economy, however, it is important to be aware of this crucial time before us.  The Dow recently closed at its highest level in over 6 years.  While that is certainly good news, I cannot help but wonder how much higher the market can go before a correction will occur.

The most important issue herein is that we must be aware and prepared for whatever lies ahead.  As we sit here today, the economy and the market look very good.  In addition, regardless of what happens over the short-term, the overall long-term outlook of the market is, and remains, strong.  The market has averaged almost 10.5% over the last 50 years and most project that the economy will continue to show strength and growth in the long run. 

In accordance, investors investing in retirement plans must continue to understand they are investing for the long-term.  Our strategy has always been to pick a proper portfolio and stick with it through good times and bad.

In building AdviseMe!®, we have constructed Model Portfolios that are intended to perform well in good markets and to protect your savings in bad markets.  This is not to imply the return will always be positive, because in some markets this is not possible, however we believe these Portfolios will reduce and control your risk.  While it is not our hope or desire for the market to correct itself, we believe we are very well positioned for that event if, and when, it occurs.

We have always 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 participation in AdviseMe!®, and we look forward to working with you in the future.

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