Our Quarterly Commentary
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Quarterly Investment Commentary

Stocks continued to climb in September, bringing the third-quarter gain for the large-cap Vanguard 500 Index Fund (which replicates the S&P 500) to 16%. For the year-to-date, that benchmark is now up 19.3%. In terms of market cap, the small-cap iShares Russell 2000 gained 19.2% in the quarter, and is now up 22.4% for the first nine months of 2009. Mid-caps outperformed both larger- and smaller-caps, gaining almost 21% for the quarter and more than 32% for the year-to-date. Foreign stocks continued to outpace their U.S. counterparts, with Vanguard Total International Stock Index Fund gaining almost 20% in the third quarter and 32.5% for the year to date. Emerging-markets equities (based on Vanguard Emerging Market Stock Index Fund) continued its sharp rally, with a near double-digit gain in September bringing their third-quarter return above 21% and its year-to-date   return just north of 62%.

Turning to fixed income, the intermediate-term, investment-grade Vanguard Total Bond Market Index Fund was up 3.7% for the quarter and is now up 5.9% for the year. High-yield bonds, as  measured by the Merrill Lynch U.S. High Yield index, nearly matched the gains of domestic equities in the third quarter.


Current Outlook

While we will see more bank failures, as real estate-related loan losses (residential and commercial) continue, we are confident that the government has taken the financial-system meltdown risk off the table. The economy is probably already growing again. But the important question of how strong the recovery will be remains. It is also unclear whether it will be sustained or whether there will be another leg down for the economy and the markets (which is commonly described as a W-shaped  recession).

With drops in household net worth erasing years of gains; debt levels far too high; access to credit more limited than it has been in years; and labor markets feeble, the consumer is in a weakened state. We continue to believe it is highly probable that households will want and need to rebuild their    balance sheets, especially the 78 million baby boomers depending on their net worth to help fund   retirement. The end of the home equity ATM, and generally less available credit as financial institutions repair their balance sheets, will reinforce this trend. The consumer is 70% of the economy, so clearly consumption growth is of critical importance to economic growth. It is the expectation of slow consumer spending growth coupled with increasing regulation and likely reduced risk taking on the part of businesses and investors (relative to much of the past 20 years) that suggests to us that any near-term burst of economic activity is unlikely to be sustained at a robust level.
Tarpley & Underwood Financial Advisors, LLC           Third Quarter 2009