The S&P 500 Index broke to a new bear market low on Friday as the U.S. government took a 36% equity stake in Citigroup, and an updated GDP report showed the U.S. economy contracted at a stunning 6.2% annual rate in the fourth quarter of 2009.  The decline on Friday was the ninth in ten days, and the month’s 11% loss marked the worst February since 1933.  More worrying, the losses occurred during an important week for the Obama Administration, which included the President’s first address to a joint session of Congress, and the unveiling of his first budget.  It seems that few investors are tuned in to the high approval ratings of the new president.

We have been cautiously optimistic that November 20, 2009 marked a short term low for the market.  Although we feared the hangover from years of a debt-induced spending binge would ultimately take stock prices lower, we were mindful of the fact that some of the biggest rallies in history occurred within the context of secular bear markets.  On the bright side, signs have emerged during the recent retest of November lows that the market remains in a bottoming process.  For example, much fewer stocks are breaking to new lows compared to the November decline, and declining volume to advancing volume is much improved relative to the extreme levels seen last fall, indicating a lack of panic selling.  The better relative performances of the NASDAQ, as well as growth stocks and emerging markets, are consistent with historical tendencies around past market bottoms.
However, the current political environment and the health of banks around the globe create substantial risks that equity prices decline further.  While we all knew the Obama Administration would bring sweeping change, the anti-growth provisions of the 2010 budget are breathtaking, considering this is the worst recession since the Great Depression.  Examples: raising dividend and capital gains tax rates to 20% from 15%; reducing the mortgage interest deduction at a time when housing prices are collapsing; introducing a cap and trade system for carbon emissions which will raise energy prices for consumers; and increasing marginal tax rates on incomes over $250,000.
We continue to advise clients to maintain a defensive posture until the market exhibits more definitive signs of improvement.  Our current recommended portfolio includes just 30% in equities, with the balance in high quality fixed income securities and alternative investments such as gold and managed futures.  Investors with higher allocations to equity should look to reduce exposure should the markets continue to break down in the days ahead.


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.