2006 - The Year In Review
The concept of a “year” purportedly grew out of observations, made by humans over hundreds and thousands of years, that linked such physical phenomena as the flooding of the Nile or the migrations of birds with the appearance of certain constellations just above the horizon. more
2007 - What Is Ahead?
2006 - The Year In Review
The concept of a “year” purportedly grew out of observations, made by humans over hundreds and thousands of years, that linked such physical phenomena as the flooding of the Nile or the migrations of birds with the appearance of certain constellations just above the horizon. By contrast, the equity and fixed-income markets follow no such annual patterns, and calendar returns, in particular, hold little relevance for individual portfolios designed to last three, four, and sometimes five-to-six decades.
Nevertheless, it is good to be able to say: what a great year 2006 was for the equity markets! The S & P 500 Index returned 15.80%. Small-company stocks measured by the Russell 2000 Index returned 18.37%. And the returns were even better abroad. In fact, of the 50 countries whose equity returns are reported by MSCI, the U.S. market return (in dollar terms) ranked next to last among 23 developed markets and 42nd out of all 50 countries.
Common factors cited for last year’s returns include:
But while the happy ending of 2006 seems so clear and inevitable now, the horizon did not look so rosy to many commentators at the beginning of last year:1
When US consumer-spending weakness is felt globally, export earnings and economic activity will nosedive and murder foreign stocks. Best advice: unload your foreign equities now on all those bullish latecomers.
Of course, it’s easy to dismiss forecasts such as the ones above
with “Well, you can’t get them all right.” But what
was striking last year was the persistent “wall of worry”
that stocks climbed despite some strong evidence that company balance
sheets were in pretty good shape, inflation fairly moderate, and consumer
spending still fairly robust despite the slowdown in residential real
If either the inflation scare or the dollar scare prove correct, shares could have a long way further to fall.
By autumn, the drums were beating even more loudly in favor of a market dislocation:
It's very difficult for me to tell our clients that all is clear for them to get into the market when we have the historically tough months of September and October ahead of us.
However, September and October were the best-performing months for the
Dow in 2006. In fact, during the fourth quarter, the markets took off
so quickly that hedge fund managers were forced to abandon their art auctions
and hurry back to the office to borrow as much capital as they could in
order to dive into the buying action. If you blinked, you might have missed
it all. And if you were still holding cash from the beginning or middle
of the year, you most certainly did.
Having just underscored the difficulty of calling the markets at any particular time, are we ready to try our own hand at foretelling 2007? Not any more than highly esteemed Barron’s:
Let's dispense with the suspense. We already know what 2007 will mean for the stock market.  Because it is the third year of a presidential term, the market will be up dramatically, as has been the case in such years. But because it's a year ending in "7" that is not the second year of a presidential term, 2007 will not be as good as typical third years of the election cycle. And let's not forget that because it's a "7" year that's also the fifth year of a bull market, we'll see a late-year crash, a la 1937 and '87.
Barron’s refreshing tongue-in-cheek response to the obligatory market prognostications contains a grain of truth: the economic vital signs for 2007 are, at best, mixed. As usual, there are arguments to be made for either kind of glass, full or empty.
The case for the bulls includes the following:
On the other hand, the bears (who will eventually be right, they just won’t say when) have the following points in their favor:
Weighting these arguments to generate a reliable scenario for 2007 is,
to put it mildly, difficult. What we can say is that in all likelihood
this year’s major market determinants will not be on one of the
lists above; rather, they will be the things that no one is talking about,
at least not to any significant extent – in other words, news.
This past year BFA conducted a lengthy search for a capable office associate, and we are happy to announce that Mr. Gilden Chung joined the firm last fall. In the coming weeks, we will be sending out an introductory letter to our clients.
In December 2006, Wealth Manager Magazine quoted Milo in its article “Have Mutual Fund Fees Gone Up Or Down? Are They Fair or Unfair? It Depends On Who You Ask.” Milo noted “[t]here have been many studies showing that among the many variables applicable to mutual funds, expense ratios are one of the best—if not the best—predictors of future fund performance.” More important, expense ratios are far from the only cost involved in funds: “I’ve seen cases where the trading costs were…two to three times the expense ratios…To me, the failure to be more explicit about these added costs is one of the main reasons that individual investors fare so poorly in the market.”
In October 2006, Milo was quoted in Business Week’s article on alternative investments “Before You Leave the Beaten Path.” The article pointed out the dangers of listening to the latest siren songs about such asset classes as timber, rare coins, and oil. Regarding whether to include gold in a portfolio, Milo noted that while gold did act as a portfolio diversifier, an investor had to “be prepared to endure  mediocre returns over long periods of time in order to enjoy the diversification benefits.”
Finally, in October 2006, Milo spoke on a technology “best practices”
panel at the Financial Planning Association’s national conference
in Nashville, and last May respected industry newsletter Inside Information
profiled BFA’s use of technology to strengthen and streamline operations.
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