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Market Insight- Second Quarter 2009
During the second quarter the S&P 500 index advanced +15.93% as investors continued moving monies back into equities following the climactic sell-off in early March. This brought the total return in the S&P 500 index from the March 9th bottom to +36.88%. Even with this large snapback in the equity markets, the S&P 500 remained almost 40% below the levels of late 2007, before the banking crisis and bear market began. These volatile stock market swings in both directions continue to remind investors of the futility in trying to time the equity markets. During the market decline of the last two years Dumont & Blake client portfolios have declined substantially less than our benchmark index, the S&P 500. In the latest quarter and from the bottom of the market in March of this year, the equity portion of client portfolios have generally performed very well compared to the S&P 500 index. Our outlook for the economy and financial markets is covered in the attached Market Commentary. Finally, we are very pleased to
announce that Dumont & Blake is partnering with MJC Advanced
Financial Strategies, LLC, an estate and financial planning firm,
allowing us to expand the services we can provide to our clients. MJC
has extensive knowledge and expertise to help individual clients with
their estate planning needs. We plan to introduce MJC’s services to all
of our clients over the next few months. Our Outlook Economic data released over the past few months has given continued evidence of a weak economy, albeit one that appears to be giving some signs of bottoming. Current consensus economic forecasts project this recession will end during the second half of 2009, with slow but improving growth into 2010 and beyond. Equity investors always look out two to three years and we believe that markets will be meaningfully higher three years hence. While it will not be a straight line upwards, we believe that current valuations, combined with renewed economic growth to come, will work jointly to push markets to levels well above where they now stand. While we are optimistic looking over the horizon, we are currently observing a significant number of potential problems for the U.S. economy as a whole, and equity markets in general. The federal deficit has topped $1 trillion for the first time ever and could approach $2 trillion before the fiscal year ends in October. The $787 billion stimulus plan, rushed through Congress in February, has not done anything to help job creation, and in fact, may have worsened the situation. When President Obama first pushed for the stimulus, he declared that unemployment could reach 8% if nothing were done. (The unemployment rate was 7.2% at the time). We are now at 9.5% unemployment, and this week, the President said he expected unemployment to continue rising for several months. Two and a half million jobs have been lost so far in 2009. Lastly, as governments from municipalities up through the federal government seek higher revenues in the downturn, taxation has become another issue to monitor. The healthcare discussion currently winding its way through Congress has some direct tax implications for both consumers and corporations. Higher tax rates have traditionally led to lower tax receipts so we warily watch the proposed changes being discussed to the U.S. healthcare system. While not directly implicating the current President, thus far policies enacted this year have done little to ameliorate the job cuts. Rising unemployment combined with skyrocketing deficits have some economists harkening back to the doom and gloom malaise of the 1970’s – a “lost decade” for equities. We do not share their pessimism, and have seen several positive signs that the current economic decline is abating. Recently reported earnings results continue to affirm that the worst is behind us. We remain optimistic but continue to monitor the economy for signs of unexpected weakness. Portfolio Positioning We reduced cash positions in most client portfolios during the second quarter, continuing to scale back into equity positions where valuations warranted. We became “net buyers” of equities during March this year, after spending many months raising cash levels. While still not at fully invested levels in equity portfolios, we have more committed to equities than we did three months ago, and continue to seek opportunities to move more of these cash reserves back into equities over the coming months. During the second quarter we moved to modestly increase our holdings in the more cyclical areas of the market – industrials, basic materials and consumer discretionary, while reducing slightly our positions in healthcare and consumer staples. While still underweight in the financial area, we are seeking the right combination of valuations and fundamental strength before committing fresh capital to this sector. The residential mortgage debacle may be behind us, but commercial real estate will continue to cause problems for banks going forward. Conclusion We continue to remind clients about the importance of risk control in their portfolios. Controlling risk is multi-faceted and consists of proper asset allocation, aligning income with client cash flow needs, and the construction of well-balanced equity portfolios. During the bear market from October 2007 through early March 2009 the S&P 500 index declined by over -55%. Dumont & Blake clients saw the equity portion of their portfolios decline far less than this amount due to our risk control discipline. Equally, we are encouraged that during the significant +35% rally since early March, client portfolios have fully participated in the upside move, showing that we did not outperform during the downturn simply by owning overly conservative stocks. Client equity portfolios have outperformed the S&P 500 over the past one- two-, and three-year periods. Due to the depressed levels of economic activity along with the low equity valuations we are observing currently, we continue to expect returns from equities over the next three to five years to be above the long-term average. We expect to continue methodically increasing equity exposure where conditions warrant.
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