Download February 2007 Market Commentary Despite suffering the largest

February 2007 Market Commentary
Despite suffering the largest single-day point drop in the Dow Jones Industrial Average
(Dow) in more than five years, the markets still managed to finish the month with mixed
results.
Domestic equities were up modestly through most of February. But investor concerns
over weaker-than-expected durable goods orders, turmoil in China and the softening
residential housing market, among other factors, led to a single-day decline in most
indexes not seen in several years. As a result, the Standard and Poor’s 500 Index (S&P
500) finished down 1.95% for the month, while the broader Russell 3000 slid 1.64% for
the same period.
Fixed-income instruments, however, provided positive returns as investors sought an
alternative to equities. Yields on 5- and 10-year Treasury bonds ended the month at
4.52% and 4.56%, respectively, both down from January’s close. The Lehman Brothers
Aggregate Bond Index posted a 1.54% gain in February, with longer-term maturities
leading the way.
In the emerging markets, the Shanghai Composite Index’s 8%-plus drop on February 27
spooked markets around the globe. But other emerging markets held their ground for
the month, including Korea and Taiwan. Consequently, emerging markets were down
only fractionally in February. The MSCI Emerging Markets Index declined 0.60%.
Similarly, developed markets retreated slightly in local currency terms in February, with
Japan as the most notable positive exception. Because of the weakness in the U.S.
dollar, however, U.S. investors recorded a small advance of 0.82% for the month (MSCI
EAFE Index).
Elsewhere, after jumping an impressive 7.88% in January, REITs pulled back in
February as the NAREIT Index declined 2.89%. Overall, domestic equities, REITs and
emerging markets lost ground for the month, while developed and fixed-income markets
advanced.
Opinions about the overall health of the U.S. economy abound, and investors seem to
have come to one of two conclusions: either the pullback in equities in February is
nothing more than a breather from months of solid market performance, or it is a
precursor to an unwelcome bear market. Our view is that if the economic scenarios
detailed below are resolved favorably, we can avoid a bear market this year.
Obviously, not all recent economic news has been positive. The Commerce Department
reported that growth in gross domestic product, or GDP, was revised downward for the
fourth quarter of last year. Business spending and industrial output also fell more than
expected. One scenario is that forthcoming economic reports cloud the economic
horizon (i.e., continued slump in housing, lower factory orders, slowdown in consumer
spending, etc.). In this case, the Fed may be prompted to lower interest rates before the
end of the year.
Another scenario is that oil prices stabilize (or, preferably, decline). Because energy
costs are embedded in production expenses for most companies, stable prices are
beneficial. Lower energy costs likely will ease inflationary pressures over time, allowing
the Fed greater flexibility to reduce interest rates this year.
Yet another favorable scenario is that corporate earnings come in as expected (or better
than expected). Standard & Poor’s estimates that 2007 fiscal year earnings growth as
reflected by the S&P 500 Index will be 8%, which is lower than the recent double-digit
pace of growth, but still very solid. Valuations (based on the average price-to-earnings
multiple year to date) for the S&P 500 Index stand at 17.80, in line with historical
averages and considered reasonable.
Market data courtesy of Bloomberg. Indices are unmanaged and cannot be invested
into directly. Past performance is no guaranteed of future results.
The Market Commentary provided represents the opinion of National Planning Holdings and should not be considered a
recommendation to buy or sell securities. All information presented is believed to be reliable, however, we can make no
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