Smart401k Blog

The sharp, quick drop in the market at the start of 2008 makes it easy to forget the slower, across the board market drop in the fourth quarter of 2007.

Here is how the year finished:

Data provided by Morningstar. 3 and 5 year returns are annualized.  Bold items are indexes for comparison purposes   The S&P 500 is often used to represent the performance of the overall US Market. The MSCI EAFE ND Index is used to approximate the performance of the overall foreign equity markets.  The Lehman Brothers Aggretage Bond Index is used to approximate the overall performance of US Bond markets.  The 3 month Treasury Bill performance approximates the overall performance of short term fixed income investments such as money market funds. Market Performance Commentary

• While every US based market asset class declined in this last quarter, value Oriented Funds had the biggest across the board decline. Large, Mid and Small company value oriented funds were all down at least 5% for the quarter. Growth oriented US funds all performed measurably better. From the perspective of all of 2007, here are the differences in returns between value and growth oriented performance, by category: (subtracting the 2007 growth return from the 2007 value return)
  • Large Companies: 11.93 %
  • Mid-sized: 14.26 %
  • Small: 13.67
• When looking at these same spreads over a 5 year annualized timeframe, we get these differences
  • Large Companies: -0.41 %
  • Mid-sized: 0.78 %
  • Small: 1.05 %

This large 2007 spread is remarkably similar by asset class, and once again shows the importance of diversifying across asset classes and in mutual funds that invest in the different sized companies. The smaller spread over a 5 year timeframe illustrates the historical evening-out trend of returns over longer time period. Recall that in 2005 and 2006, value funds outperformed growth funds and mid and small company focused funds outperformed large company focused funds.  Now the tables have turned.  While our Smart401k allocations have been overweighting growth funds for the past year and a half, we are returning to a more even balance between the two, in anticipation of value oriented funds doing relatively well over the intermediate-term.  Over the past year or so, we’ve also overweighted large company funds, and continue to do so.

• International stock performance has continued to outperform US Equities. As can be seen in the performance chart, international funds, and especially emerging market funds, continue to outperform the US markets, although this past quarter, they also experienced reduced gains. Our recommended allocations now have international funds at close to “normal” levels.  While we continue to believe that emerging markets have a much higher than normal chance of returning to earth in the coming 6-12 months, we also believe that diversification across both US and international funds is important to our clients in the face of the high volatility in the US markets.

• Taking a longer-term perspective on market performance, the overall markets as measured by the S&P 500 are up an average 8.62% per year over the past 3 years, and 12.63% per year over the past 5 years. It’s interesting to note that with the exception of large company growth funds which trail by a small amount, every US Equity category listed above exceeds the S&P 500 for the 5 year annualized time period.

In comparing the 5 year performance of the Lehman brothers Aggregate bond index (a measure of the overall bond market) to the S&P 500, we see that the 5 year average performance advantage of US equities over bonds is over 8% - a healthy difference.

• One market characteristic that isn’t factored into the market performance averages shown in this table is market volatility.  As we’ve previously noted, after a period of relative calm, volatility (sharp short-term market increases and declines) has returned to our markets with a vengeance.  As of January 14^th, the S&P 500 is down more than 11% from highs reached in early October, putting us once again in correction territory.  Thus far in 2008, we’ve seen a negative swing of -4.5% in the S&P 500 through January 11^th. We expect continued market volatility in the near future.

This entry was posted on Wednesday, January 16th, 2008 at 9:12 pm and is filed under Market Commentary. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.