Our Quarterly Commentary
Information on this site is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Quarterly Investment Commentary

Stocks saw their best one-month gain in March in more than six years, but while it was a welcome respite from the battering in January and February, the first quarter still ended with a double-digit loss for equities. The large-cap S&P 500 (based on Vanguard 500 Index Fund) surged by almost 9% in March, yet finished the first quarter with an 11% loss. REITs were beaten sharply lower as investors reacted negatively to deteriorating fundamentals and fears about debt rollovers, and after a weak rebound in March finished the quarter down 32.1%. High-yield bonds, on the other hand, had the best showing of any of the broad asset classes we track, with a gain of 5.3% for the opening quarter. Abroad, the results for developed-market equities were similar to what we saw at home. Vanguard Total International Stock Index Fund gained over 9% in March, but their 13% loss for the quarter was a bit worse than that of domestic equities. In contrast, emerging-market equities had a great March and finished the first quarter slightly in the black, based on Vanguard Emerging Markets Stock Index Fund. Turning to bonds, Vanguard Total Bond Market Index Fund was up 1.5% for the month, bringing its year-to-date results slightly into the black.

Recap of the Current Economic Situation

The list of issues affecting today’s investment landscape is challenging; at the top is the dismal state of the global economy. The fundamental problem is that over the past several economic cycles U.S. households and financial services businesses took on increasing amounts of debt in order to fund consumption and investments. This trend was self-reinforcing as purchases with borrowed money drove up asset prices (such as homes and financial stocks) and profits, which supported even more borrowing. Ultimately this upward spiral was unsustainable, and its unwinding has created an adverse feedback loop of falling asset prices and lower spending and profits. As the economy deteriorates, contributing factors (such as rising unemployment, mortgage defaults, loan write-offs, reduced lending, and overall fear) all fuel one another. In such a situation, most experts agree that the government needs to step in as a consumer and lender of last resort to try to stop or mitigate the effects of this adverse feedback loop. In effect, the public sector (the government) must take on more leverage and spend more in order to try to plug the gap created by the de-leveraging in the private sector. The $800 billion fiscal stimulus package and the monetary and credit policy actions undertaken by the Federal Reserve and the Treasury to support the financial and credit markets are the result so far.

Please Continue Reading on Next Page
Tarpley & Underwood Financial Advisors, LLCFirst Quarter 2009
The broad economic environment remains highly stressed, and there is a great deal of uncertainty as to what the impact of the recently enacted government policies and programs will be.
Broadly speaking, the near-term imperative is to prevent a debt-deflation spiral from taking hold and that is the basis for policy actions. But longer-term these actions are likely to
come at the cost of lower growth, higher inflation, and dollar weakness.
We consider four broad economic scenarios that we believe are reasonably possible in assessing valuations and potential returns for equities and other asset classes. We believe the likelihood of one of our more negative scenarios playing out is high enough to justify weighting thos scenarios more heavily in our portfolio allocation decisions.
Short-term risk remains, and investors should consider now how they would react to another significant decline in the stock market.
Certain material in this work is proprietary to and copyrighted by Litman/Gregory Analytics and is used by Tarpley & Underwood Financial Advisors, LLC with permission. Reproduction or distribution of this material is prohibited and all rights are
reserved.