FIRST HALF '06 - Half Empty/Half Full?

July 14, 2006 - Summer's in full swing and at this writing, it is a lovely, sunny day. However, throughout the country, we all have experienced some pretty rough weather, and the markets have provided no less of a smooth ride. By the end of the quarter, thanks in part to a lack of clear communication, or understanding thereof, from new Fed Chairman Ben S. Bernanke, the 2nd Quarter seemed destined to fizzle out like a July 4th dud. However, like heroes of our childhood, the Fed and the media rode to the rescue on June 29th with the implied forecast that the long string of interest rate raises may have come to an end.

The major indices returns year-to-date through the end of the First Half ended as follows: The broad market as measured by the S&P 500 Index ended the quarter at 1,270.20 +1.76%; the Dow Jones Industrial Average 11,150.22 +4.04%; and the NASDAQ at 2,172.09 (1.51%). As for bonds, Treasuries have declined 1.08 percent, including reinvested interest, this year, according to an index compiled by Merrill Lynch & Co. It's the worst performance since 1999, when Treasuries tumbled 2.72 % in the same period, Merrill data show. Yields on 10-year notes rose to a four-year high of 5.25 % on June 28. They've started to rally on signs the Federal Reserve's 17 interest-rate increases are slowing the economy.

The overriding concern roiling the markets in my, and I'm not alone, opinion is inflation fear. Just this past Friday, July 7th, the Labor Department reported the economy added 121,000 jobs in June, fewer than analysts had forecast. So, what happened? The Dow dropped .53%, the NASDAQ closed -1.94% and the S&P 500 ended the day -.37%. This reaction on the part of the investing public reinforces our belief that emotions, rather than logic, more often than not motivate investment decisions.

Let me explain my thinking here. The Fed has continued to raise interest rates in the belief that doing so will slow the economy. OK, 17 rate hikes later, Chairman Bernanke and his fellow governors state that "the Committee judges that some inflation risks remain." Source: Federal Reserve Press Release, 6/29. The tone is moderated from past statements. A week later Jobs Report shows that the economy may indeed be slowing and what presumably could be the beginning of a soft landing for the economy rattles the market. I believe, taking into account the ongoing threat of terrorism and the "Axes of Evil", that our monetary policy is on the right track. The Administration's fiscal policy is another issue, and as the mid-term elections near, we may see pressure brought to bear to legislate positive changes beyond those of the Tax Increase Prevention and Reconciliation Act passed last May.

Perhaps the returns for the first half 2006 are no cause for celebration, but neither is there reason to lament. Always keep in mind that your portfolio is designed for the long-run, and as long as you're on track with no major life-style changes that would require reevaluating and changing your overall strategy, you should be in fine shape and "half full."