INVESTMENT NEWSLETTER
July 2009

2nd Quarter Fireworks

Although U.S. stocks ended in June only slightly ahead for the month, they still posted their best quarterly advance since 2003. A powerful rally off 12-year lows in March lifted all boats. After losing ground in five of the last six quarters, major market indices enjoyed substantial rebounds. During the second quarter, the S&P 500 was up 16%, the DJIA 11%, 21% for the small-cap Russell 2000 and 20% for the tech-oriented Nasdaq Composite.

Global stock markets had their best quarter in 20 years. The FTSE All-World Developed Market index enjoyed its strongest performance since 1987, while the All-World Emerging Markets index gained 36%, its best performance since it began in 1993. European markets were about on par with the U.S. Japan gained 23% as most Asia markets put in strong quarterly performance.

Slogging Toward Recovery
Despite signs that the economy is beginning to stabilize, investors remain uncertain about the future. Historically, stocks have tended to bottom about four months before the economy and earnings growth has bottomed about two months after the economic trough. But, as markets continue to teach us, stock prices are unpredictable and simply do not move in a straight line. Although market declines are normal, we've been through the most extreme drop of our lifetimes and it has taken a toll. We all know that over the long-term, stocks have provided the best returns. Money that will stay invested for 20 years should be in stocks. Cash, for all its ability to buffer a portfolio, has not offered protection against eroding purchasing power in the long term. Long-term investment portfolios should generally maintain a mix of both stocks and bonds. The price we pay for higher long-term returns is market volatility, and recent volatility has been extraordinarily high.

Higher volatility can make Upgrading frustrating, but smart investors maintain a long-term focus, especially because stock investors typically earn higher investment returns after periods of sharp losses. The worst time to abandon an investment discipline is often just when sentiment is lowest and reports most pessimistic. The reason "buy low, sell high" is so elusive is that it requires buying when news is bad, and continuing to buy as it gets worse.

What's Working Now
Among the new funds rising in the ranks we're seeing greater diversity, with an apparent increase in risk appetite. And last quarter finally showed that taking risk can pay off. Technology has taken a lead in the recovery with impressive gains, although only a handful of tech funds have reached the Buys. Remember our scoring system has a built in lag that helps us focus on confirmed trends. In domestic tech and small cap growth funds are beginning to reappear, along with emerging markets funds, particularly Asia and Latin America.

Within small-cap, both growth and value performed well in the second quarter, but growth continued its performance advantage over value. For this year to-date the growth advantage was pronounced, with the Russell 2000 Growth index up 11% versus a decline of 5% for the Russell 2000 Value index.

Small-caps as a group led large-caps off the bottom, as is common in strong markets and recovery periods. When confidence improves, small-caps are often the first to sprout; they've led 12 of the past 15 bear market recoveries. Typically, small-caps have more to recover because they take a more severe drubbing than larger firms. But with large financials at the center of the recent crisis, the S&P 500's drop was almost as bad as the Russell 2000's. For this decade, from 12/31/1999 to 6/30/09, small-caps have outperformed large-caps dramatically, with the Russell 2000 up 14% versus the S&P 500's 26% loss.

Foreign funds lagged last month but many remain relatively highly ranked. Top performers continue to be a mix of domestic and international funds as well as both growth and value funds, but we see large cap U.S. growth funds rising up the ranks.

We look forward to another productive quarter. If we can be of any further assistance, please do not hesitate to contact us!

Thank You for your trust and continued support!

Sincerely,

P. Michael Valley II
Estate Planning Professionals