After rallying for nearly three weeks, equity markets sold off sharply on Friday to end the month in the red.  Dismal economic news including higher inflation readings, continued declines in home prices, and worse than expected orders for durable goods indicate the U.S. economy is brushing with a recession.  In addition, crude oil neared its inflation-adjusted record of almost $104 per barrel as commodity prices surged, putting further pressure on consumers and businesses.

In addition, the credit market dislocation spread to high quality assets last week.  The municipal bond market is experiencing substantial liquidity-driven turmoil, as prices have fallen for 14 consecutive days and February was the worst monthly performance for municipal bonds in 19 years.  The selling pressure was broad-based, from high quality AAA-rated bonds to high yield bonds.  However, unlike the subprime mortgage crisis, the selling in the municipal bond market has not been caused by problems with credit quality.  As a result, this market dislocation has created a major opportunity for investors to take advantage of historically high tax-exempt yields relative to Treasuries.

The current market environment is unfortunately consistent with our forecast for the first half of 2008.  Uncertainty over the ultimate scale of the credit crisis and associated de-leveraging process, along with the slowdown in the economy, has created a volatile trading environment.  We continue to advise a cautious approach to riskier assets.  We believe the S&P 500 has strong support near the January intraday low of 1270, and expect resistance near 1400 until uncertainties begin to ease.


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.