Gloomy Quarter Has Silver Lining

04/10/2008 12:00 am EST

Focus: MARKETS

Janet Brown

Editor, NoLoad Fund*X

Janet Brown, editor of NoLoad Fund*X, says the first quarter was a disaster for most investors, but the very worst may be over soon.

After enduring a dreary winter and the worst first quarter in six years, investors are eager for signs of life.

Stocks bounced after mid-March, and most indexes finished the month with only minor losses. But the brutal first quarter left the Standard & Poor’s 500 down 10% since the start of the year, and down 16% from the high reached last October. Although the Nasdaq was positive in March, it lost 15% for the quarter, and 20% from its high.

Reverberations from the US financial mess were felt around the globe. The Europe, Australasia, and Far East index (EAFE) underperformed the S&P 500 slightly in March, and was even worse for the quarter, down 15% in local currency. Worst hit were Germany and Japan both down over 16%. Formerly high-flying India sold off close to 20% and China is down more than 30% so far this year.

The average diversified US stock fund ended the quarter down 10%, and bear funds were the only category of equity funds ending with positive returns. Surprisingly, after strong performance in March, real estate funds came in second, with only slight losses so far this year. Sharp declines in commodities hurt natural resource funds.

Value funds outperformed growth funds, as is usual in down periods, and large-cap funds mitigated losses better than their small-cap counterparts during the quarter. In March there was little difference between value and growth, but large caps continued to outperform small across the board.

The US dollar fell yet again in the first quarter, down 7.5% against the euro and 10.5% versus the yen, reaching new lows against the euro and its weakest level against the Japanese yen since 1995. But here, too, light may be appearing at the end of the tunnel in reports that the dollar is as undervalued against the major currencies as it’s ever been. As the dollar’s weakness stretches into its sixth year, analysts are signaling that an end could be in sight.

As we all know, stock market declines are normal and expected. We also know that when the stock market moves up after a decline, it tends to move in bursts and investors who are on the sidelines will not participate.

As always, the simplest protection during down market periods is to start with an appropriate asset allocation that suits your risk tolerance. In the first quarter of 2008, for example, the worst days for stocks ended with significant gains for bonds, and vice versa. Such noncorrelation enables investors to weather financial storms.

Subscribe to NoLoad Fund*X here…

Related Articles on MARKETS