INSIDE FINANCE
“The Long Hot Summer” and the Markets
With apologies to William Faulkner

By Robert M. Jaffe, MBA, AAMS
August 19, 2005

At this writing we’re suffering another 90+ degree day and going for a record number of over 90 degree days in a month. Whatever the “dogs days of August” may really mean, we certainly are experiencing them.

We are also experiencing 90’s in the markets. On August 11th, the Dow was up 91 points. On August 12th, the Dow was down 86 points, and so it goes…”good” volatility (up) and “bad” volatility (down). I use this two day period as an example of what we refer to as market “noise.” The network and cable pundits blather on about market performance in the shortest term, with such “earthshaking comments” such as “the XYZ Corporation earnings look dismal”, implying investors should head for the hills. After all, they have to fill their appointed time slots with something, since viewers can tune in “24/7.”

While many of you may have been escaping the heat, or hoping to, basking in the sun and ocean breezes at the shore, U.S. equity markets rebounded, bringing year-to-date returns to nearly even. Energy, utilities and healthcare led the way. Bond markets also rebounded, erasing first quarter’s negative returns. The Fed continues to tighten monetary policy and has raised the Fed funds rate yet another 25 basis points as Messrs Greenspan and company keep a watchful eye on inflation. Year to date, Real GDP increased 3.8% in the first quarter and is expected to have gained 3.7% in the second (Source: Economy.com as of July 1, 2005).

OK, so things may look reasonably stable despite the ever increasing price of oil, now $67+ per barrel and sticker shock at the pumps doesn’t appear to diminish U.S. drivers’ thirst for hitting the road. But near term performance aside, let’s step back up and glance at market history.

The year 2002 marked a low point that may have motivated quite a few investors to throw in the proverbial towel. We had lived through the bursting of the dot.com and “9/11”, terrorism looming in our collective mind. One dollar invested year-end 1925 in small company stocks was worth $6,816 and large company stocks - $1,775 at year-end 2002. Time to get out? Jump ahead to year-end 2004. That same dollar from 1925 was worth $12,966 invested in small company stocks and $2,533 in large company stocks. (Source: Ibbotson Associates – hypothetical value of $1 invested at year-end 1925. Assumes investment of income and no transaction costs or taxes.) According to Ibbotson, the compound annual return of small U.S. company stocks since 1925 is 12.7%, large company – 10.4% and long-term government bonds 5.4%. It’s your call, but the lesson is clear, look at the long-term, not the long hot summer.

Please Email bob@cfsias.com with your questions.

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INSIDE FINANCE will appear regularly, addressing financial matters of interest to our readers. Any questions? Email bob@cfsias.com

Registered Representative, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member NASD/SIPC. Cambridge and CFS are not affiliated.

The preceding article is for informational purposes only and should not be used as the primary basis for an investment decision. Indices mentioned are unmanaged and cannot be invested into directly. Past performance does not guarantee future results. All examples given are hypothetical and do not reflect actual investments. The views expressed in this article are those of the author and are not necessarily those of Cambridge. Bob Jaffe is Managing Director of CFS Investment Advisory Services, LLC in Totowa and has been a Clifton resident since 1984. Active in community affairs, Bob is Past Board Chairman of the North Jersey Regional Chamber of Commerce and a member of its foundation board. He serves as a commissioner on the Clifton Rent Leveling Board and the Committee for Individuals with Disabilities. He is Vice President of the Clifton Rotary Club. Representatives of Cambridge do not offer tax or legal advice. Consult a professional for your personal situation.