Insightful Investing Newsletter April 2005
1st Quarter 2005 Market Recap
There was no place to hide in the 1st quarter of 2005, well at least not unless you were heavily invested in Oil, which hit record highs over $57 per barrel in March. In addition to high energy costs, increasing interest rates also weighed on the stock market. With these two threatening the market all quarter, its almost amazing that stocks held up as well as they did. The S&P 500 lost just over 2% for the quarter, which given the circumstances could be considered a victory..
Surprisingly, Bonds, International Stocks, and Mid Cap Stocks held up the best as all three lost less than 0.5%. Why surprising? With the continued tightening of interest rates by the Fed one might have expected a bigger decline in Bonds. While the turnaround in the dollar is not that surprising given the rising interest rates, it did not go up enough to significantly hurt International investment returns, yet. A continuation of that trend could put a damper on returns from overseas down the road.
At first glance it may seem a little strange that Mid Cap Stocks performed better that both Large Cap Stocks and Small Cap Stocks as most of the time this asset class has returns between the other two. Looking a little closer at the boom and bust cycles that occurred over the last 10 years, guess who came out on top? To our surprise the winner was Mid Cap Stocks, gaining 2.5% more than both Large Cap Stocks and Small Cap Stocks, both of which had annualized gains approaching 11% during this time frame. While that may not sound like much, compounded over 10 years, you would have 40% more money. For example, if you had invested $10,000 in Small Cap Funds or Large Cap Funds 10 years ago, you would have about $17,000 today. If on the other hand, you had invested that $10,000 in Mid Cap Funds, you would have about $24,000 today. Maybe you really do need to break down your Market Capitalization allocations three ways instead of two. Sure looks that way to us.
Doesn’t sound too bad, so why, you may be asking yourself, were we trash talking the stock market so much in the beginning of this newsletter. That is pretty easy to explain. Two of our favorite categories on the way up over the last few years needed a breather as Small Cap Stocks and Real Estate Funds fell 5% and 8% respectively this quarter. While we haven’t given up on these stocks, its nice to know that we avoided a 9% drop this quarter by continuing to stay away from Technology Funds which had their worst quarter since the 3rd Quarter of 2004. One good thing we can say about Technology Funds is that the 20% annualized return for the past 5 years will probably look much better next quarter on our benchmark chart since the peak of the NASDAQ bubble will no longer be included in 5 year calculations. Now that is one anniversary we have no interest in celebrating.
Our analysis would not be complete without pointing out that Value equities once again outperformed Growth equities as they have for most quarters over the last 5 years. Could it be time for the market to revert to the mean and start favoring growth stocks again? Only time will tell. In the mean time, we continue to recommend the diversification of being invested in both styles across all market capitalizations.
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