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The TD Banknorth Wealth Management Group Economic and Market Outlook: March 31, 2008
Glenn S. Davis, CFA
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The stock market found little to celebrate about this quarter. The credit crunch continued to have a negative impact on the market with the highlight being the fall of Bear Stearns, and the Fed arranged purchase of Bear by J.P. Morgan for $2 (raised to $10 a few days later). The credit crunch spread during the quarter, and the Federal Reserve acted in various ways to keep the financial system afloat. While there is liquidity in the system, the liquidity was not finding its way into the areas which needed it the most: the brokers and hedge funds. These entities were finding it harder and harder to finance their securities positions as counter parties became very selective about the collateral that would be accepted to secure the loans. In particular most mortgage backed securities (including plain vanilla GNMAs) were becoming hard to finance. It is at this point that the Fed stepped in and allowed the brokers to use this collateral to obtain loans from the Fed's Discount Window. Typically the Discount Window is only open to banks, but using a little invoked power, the Fed was able to provide liquidity to the brokers. This will not solve the credit crunch, but helps the markets function in a better manner. The bond market rallied as the Fed lowered short-term rates and investors continued to favor riskless assets. Investors pushed the yield on three-month treasury bills as low as 0.56% down from 3.33% at the beginning of the year. The yield curve became even steeper as short-term rates declined more than long-term rates. In the last year short-term rates have dropped almost 400 basis points.
Source: Baseline
As treasuries yields declined, the risk premium of other types of fixed-income securities increased during the quarter. No sector was immune from this re-pricing of credit risk. Obviously some credits and sectors deserve to have higher yields, while others do not. This wholesale flight from risk is creating some interesting opportunities for investors. Among the sectors that have become very attractive are municipal bonds. Tax-free bond yields have increased across the board and many high-quality issuers' bonds are yielding almost as much or, in some cases, more than treasuries. A rare occurrence, but one that we are taking advantage of in portfolios.
The U.S. economy is definitely slowing down. Consumer confidence is weak and the residential real estate market is faced with high inventories and weak pricing. The consumer is impacted by two things: jobs and their feeling about the value of their home. Currently, the consumer is not very confident.
Stock Market Returns
Source: Bloomberg. Total Returns annualized for periods greater than 1 year. Dividends reinvested.
Bond Market Total Returns
Source: Lehman Brothers, Merrill Lynch. Total Returns annualized for periods greater than 1 year.
What to do?
Investors face a slowing economy, a weak housing sector, a more hesitant consumer, a weak dollar and the expanding shadow of the sub-prime situation. What to do? At the risk of sermonizing – stick with your plan. Sounds cliché, but we are firm believers that in times like these this is exactly why investors develop long-term plans and strategies. The value of asset allocation becomes very clear in this type of environment. Notice how bonds did well even as domestic stocks declined. Our mission, as always, is to work with you to make sure that your portfolio is positioned for your long-term success.
Glenn S. Davis, CFA
Senior Vice President & Chief Investment Strategist
The information contained herein is based on sources believed to be reliable; however, its accuracy is not necessarily guaranteed. Views are as of 3/31/08 subject to change based on the stock market and other conditions. These views should not be construed as a recommendation for any specific security. The investment professionals of TD Banknorth Wealth Management Group may conduct transactions contrary to the comments herein. In addition, TD Banknorth Inc and TD Financial Group. directors and employees may have positions and effect transactions in the securities mentioned herein and may serve as directors of such issuers.
Past performance is no guarantee of future results. Diversification does not assure a profit nor protect against loss.
S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Nasdaq Composite Index: An unmanaged index that measures all Nasdaq domestic and non-U.S.-based common stocks listed on the Nasdaq Stock Market.
This report is for use by TD Banknorth Wealth Management Group clients only.
