What’s Up and What’s Down

03/11/2008 12:00 am EST

Focus: MARKETS

Janet Brown

Editor, NoLoad Fund*X

Janet Brown, editor of NoLoad Fund*X, says some things are doing well, even in a bad market, and she gives some tips on how to navigate the treacherous waters.

Although not nearly as bad as January, February ended lower after a sharp sell-off on the last day. For the month, the Dow Jones Industrial Average closed down 2.8%, the Standard & Poor's 500 index down 3.3%, and the Nasdaq Composite index declined 5%. The EAFE Index gained 1%, due entirely to the strength of the euro against the dollar.

Global markets are responding to fears of recession and/or stagflation, stoked by slower growth and surging commodity prices, particularly oil. So far this year, the broad market S&P 500 Index [has fallen more than] 10%, the worst start to a year in recent memory.

But take heart in knowing that the stock market is forward looking. Markets typically decline as the specter of an economic downturn approaches, but they tend to stabilize as the downturn takes hold. Most importantly for investors, markets usually rebound significantly from the economic trough. The S&P 500 Index rose 24% on average in the six months following ten of the last 11 recessions. (The one exception was 2001 when stocks were overvalued heading into the downturn.)

As is usually the case in down markets, some funds brought in good returns in February: with commodity prices soaring, natural resource funds gained 11% on average, the top performing domestic fund category, followed by gold funds, up 10%. Energy and materials funds were strong. Most mid- and large-cap growth funds eked out small gains. Financial and telecom funds were among the weakest.

Outside the US, Latin American funds performed best while China and Southeast Asian funds also bounced. Internationals once again got a boost from the weak dollar, which was weighed down by concerns about the US economy and the Federal Reserve's interest rate-cutting campaign.

Lower US interest rates tend to weaken the dollar. And a weak dollar tends to support high oil prices. Commodities offer a hedge against a falling dollar, and oil futures bought and sold in dollars are more attractive to foreign investors when the dollar is falling.

Today, stocks are relatively good value compared to historical valuations. Markets this year have experienced greater volatility than in recent years, but history also tells us that this is normal. Certainly stock markets can be volatile for short periods, but over time, patience and discipline are rewarded. Don't focus on short-term market turbulence and lose sight of your long-term financial goals.

That said, if you have less appetite for risk, you might consider reducing your equities or take a more defensive posture to buffer the shocks the markets will offer.

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