Investing in a Stable Stock Market
On July 7th 1999, the Dow Jones Industrial Average closed at 11,187.36. That is a mere 37 points higher than the closing level for the Dow at the end of the second quarter of 2006. In other words, in spite of the ups and downs, the stock market has gone nowhere for seven years. Over the short term, the market has not been as stable. It has climbed to much higher levels and has fallen to lower levels. It is becoming more apparent to all investors that to make money in the stock market requires market timing and the ability to pick the right stocks.
In Portland, Oregon, the average year round temperature is 54 degrees. Yet if we dressed for 54 degree weather every day, we would end up being uncomfortable most of the time. This analogy applies to a modern, “new school”, perspective on today’s stock market. It is important to evaluate the stock market long term but adjust to the realities that the world economy can change very quickly.
An investment portfolio needs to change direction in order to adjust to economic changes. Generally, the idea is to buy at low prices following a market decline with the confidence that the market will not fall much further. In addition, it is crucial to sell and take profits following publicized gains and an abundance of good news. If we use the pattern of the past seven years, we can conclude that stock market declines set the table for subsequent rallies and strong markets are soon followed by sharp pullbacks.
The second quarter proved to be one of those pullbacks. The stock market finally capitulated and declined sharply due to higher interest rates and persistently high energy prices. I did not see this correction coming. My April update described a “Half Full” condition for the stock market that projected a rising market for the second quarter. This forecast missed the mark as the S&P 500 index fell about 7% from its high point in May to its low level in June.
It was a very difficult environment for investors in the second quarter. Both stocks and bonds fell in value. The Peregrine Equity Composite, which is made up of our growth oriented clients, was down 1.81% for the second quarter and is still up .98% year to date. Our balanced composite, which is the average return for our balanced-asset allocation clients, was down .51% for the quarter and is up .67% for the first six months.
As we have seen in recent periods, a bad quarter does not make a year. Last year, the S&P 500 index also dropped over 7% during March and April. Despite this setback, our clients’ accounts, represented by our composites, shook off this decline and made solid results last year.
Past performance is no guarantee of future results. Investment management involves the possibility of losses. Significant general stock market moves up and down can influence the performance of client portfolios. Composite returns are based on client portfolios of over $100,000. Not all clients are included in the composites. All returns include the reinvestment of dividends. All returns are net of fees. Composite returns are derived from aggregated, time-weighted returns for clients of Peregrine Asset Advisers. Individual client returns can deviate from the composite returns. While Peregrine uses the S&P 500 as a benchmark, Peregrine does not attempt to mimic the structure of this index. Individual client portfolios vary. The number of securities held also varies per client.
Do you have questions or would you like to know more, contact Dan Botti.