Our 2008 market strategy called for a difficult start to the year due to credit market troubles and fears of recession. The month of March was filled with headlines consistent with this theme: the emergency bail-out of Bear Stearns by JPMorgan and the Federal Reserve; the Fed’s opening of the discount window to non-banks; lower than expected consumer confidence data; falling housing prices and an 8% drop in auto sales from a year ago. These were just some of the enflamed topics which burned even brighter with the help of expensive oil. However, markets showed signs of attempting to find a bottom as the S&P 500, Dow Industrial Average and the NASDAQ turned in the best performance since October of last year.

International developed markets fell slightly, while emerging markets sold off sharply, especially in Asia, during yet another volatile month. For March, the MSCI EAFE index lost 1.0%, and the MSCI Emerging Markets dropped 5.3%. Volatility continued as expected – and for good reason. What is likely the largest credit bubble in the history of the world continues to unwind, and despite the proclamations of many a pundit that the situation is “contained,” one could easily take the position that many more write-offs and credit problems are lurking in various corners of the world.

Kanaly’s equity models have delivered strong outperformance in this difficult market environment. Our three individual stock portfolios (Core, Growth & Income, and Diversified) are outperforming the S&P 500 Index by well over 200 basis points through the end of March. As I mentioned in my last post, our relatively stronger performance is due to a more defensive position for our portfolios, along with a reduction in equity exposure.

The Fed’s actions in the case of Bear Stearns, as well as recent successful raisings of capital by investment banks, have restored some confidence in financial markets. However, the ultimate economic impact remains uncertain as credit market conditions remain tight, unemployment is rising, and commodity prices are high. As a result, we maintain a cautious, relatively defensive approach and remain underweight in financials and consumer-related stocks.

We expect the market to find strong support near the lows reached intraday on January 23 and March 16. In the days and weeks ahead, we will be watching for further evidence of market bottoming action. Should those signs emerge, we will turn more bullish on the market’s prospects.

Disclosures

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the Funds or any stock in particular, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts.

There are risks involved with investing, including loss of principal. Current and future portfolio holdings are subject to risks as well. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Narrowly focused investments and smaller companies typically exhibit higher volatility. Bonds and bond funds will decrease in value as interest rates rise. High-yield bonds involve greater risks of default or downgrade and are more volatile than investment-grade securities, due to the speculative nature of their investments. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume.

Diversification may not protect against market risk. There is no assurance the objectives discussed will be met. Past performance does not guarantee future results Index returns are for illustrative purposes only and do not represent actual portfolio performance. Index returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index.