Our Quarterly Commentary Letters
Fourth Quarter 2008
January 21, 2009
Mr. & Mrs. John Doe
123 Peachtree Street
Atlanta, GA 30033
Dear John and Kelly,
Please find enclosed your reports for the fourth quarter of 2008. We trust this commentary will provide you with some perspective for the economic environment in which we are currently planning and investing.
Quarterly Commentary
Solid returns for stocks and bonds in December provided little relief in a year that will go in the books as the worst in decades for financial assets. While equity returns varied widely in the month, fourth-quarter and full-year returns were comparably dismal for most equity asset classes. The Vanguard 500 Index Fund, a proxy for large-cap U.S. stocks, gained 1.1% in December, but lost about 22% and 37% for the fourth quarter and calendar year, respectively. Smaller-caps closed the year with a strong 5.9% December gain for the iShares Russell 2000, but losses for the quarter were 26% and for the full year the index was down 33.7%. Aided by dollar weakness, foreign stocks saw very strong gains in December, with Vanguard Total International Stock Index Fund gaining 8.2%. The 21% fourth-quarter loss was not as bad as U.S. stocks, but for the full year the Vanguard fund was down 44%, about seven percentage points worse than domestic equities.
Domestic bonds had a good showing in December, with the Vanguard Total Bond Market Index Fund gaining 3.3%, which was enough for a very solid 4.4% gain in the fourth quarter and a 5.1% gain for the year. Among other asset classes, returns varied widely. The Merrill Lynch High Yield Master Index rebounded strongly in December after reaching record-level yields, with a 7.6% gain, and REITs, which have also been plagued by concerns about access to credit, shot up 17.4% for the month. However, both finished the year with big losses: high yield lost 26% and REITs fell 37% in 2008. The commodity futures asset class was the only loser among those we follow, with a 4.5% loss in December. This asset class, which in many environments behaves quite differently from equities and is therefore valued as a diversifier, saw a full-year loss of 35.6%, almost the same as that of stocks. But in a grim year where almost nothing unfolded according to expectations, and there was no place to hide short of stuffing cash in a mattress, that is of little surprise.
Investment Review and Outlook
For investors, 2008 was a once-in-a-lifetime train wreck. The year was arguably the most painful in modern investment history (it was the worst year for the stock market since 1931). Almost every asset class was in the red, with many deeply underwater (see the table on the last page). Government bonds were one of the few exceptions.
Clearly we are in the midst of a severe recession. Beyond that we also now believe it is not just possible, but likely, that we will experience several years of economic growth that is below the historical trend as consumers adjust to a new reality in which they finally have to pay down debt and increase savings (and thus spend less than in the past). Since the late 1980s, some have wondered when the growth in household debt would have to slow or reverse. It has taken another 20 years since, but it is now clear that the time has come.
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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.
