October 13, 2009

2009 4th Quarter Newsletter

As we write, it is a beautiful fall day outside, and we have much to be grateful for. We are very pleased to welcome Terri Propp and Allison Jensen to our team. We believe our team is now stronger than ever. We are also pleased that 5280 Magazine selected us as a five-star wealth management firm in Denver. Finally, some of you may not know that we were selected to be one of the six firms in Denver in the Schwab Advisor Network. Schwab performs rigorous due diligence and picks a small number of firms for its brokers to refer business to, and we were privileged to be selected.

The 3rd quarter marked an unexpected 15% gain in the domestic stock market. The media reported that it was “the best quarter since 1998,” but our immediate thought was that the Dow is in about the same place it was six years ago. As we look at the performance of most of our portfolios, we have a few observations. First, the portfolios have generally erased the losses since the Lehman bankruptcy 12 months ago, so significant progress has occurred. Second, our portfolios have captured a remarkable portion of the upside in the stock market this year. Contributing factors were appreciation in foreign bonds, corporate bonds, commodities, inflation-protected bonds, and emerging market stocks. Third, looking back a little farther, our portfolios show positive returns on a 5-7 year basis, showing significant outperformance and lower volatility relative to the stock market which has been flat in the same time period.

Not a day goes by without discussion of whether the stock market is due for a correction. We have a long list of reasons to be pessimistic. Government and personal debt are at historic levels. Consumers are saving more and spending less, potentially slowing the growth of our consumer driven economy. Commercial real estate is facing massive foreclosures. The budget deficit outlook is horrendous, requiring potential tax increases that may inhibit economic growth. The dollar is weak. Unemployment levels are painful, and a stagnant economy can last a long time. We could go on…

At the same time, leading economic indicators have turned, and this recession is likely coming to an end. This premise was accepted by the market in its ascent. The market also likes government stimulus – developed countries recently dropped about $5 trillion into their economies. Corporate profits have improved due to cost cutting. New layoff announcements are fewer, and unemployment rates appear to be peaking. Housing prices and housing starts have stabilized. U.S. export growth is high. Credit is flowing at least between large institutions, and low interest rates create a positive environment for growth.

Despite the progress, our view continues to be that the recovery in developed countries will be slow and choppy. The headwinds discussed above are formidable. At current stock price levels, we remain skeptical that investors should put the majority of a portfolio in stocks. We also believe that growth will be greater in emerging markets than developed markets. These emerging countries have independent economies, low government deficits or surpluses, and a growing middle class of consumers.

After considerable thought, we are making some changes reflected in the enclosed asset allocation to make the portfolios more global and opportunistic. We are moving some money out of U.S. stocks and into emerging market stocks. While volatility has been historically high in emerging markets, we want to move some additional dollars where we anticipate the growth will be greatest.

We are also implementing a general reduction in stocks and increasing our allocation to alternative investments. In fact, our typical portfolios now range from 19% stocks at the low end to 48% stocks at the high end. We have discussed on previous occasions that alternative investments have outperformed stocks and bonds by a wide margin for the last 10 years with relatively low volatility, and we continue to believe that alternative investments will demonstrate their value. With this in mind, we strongly encourage you to attend our alternative investments educational event at 11 a.m. on October 20th, featuring noted speaker Mark Yusko. (Please call to reserve a space).

In addition to these changes, we will continue our emphasis on corporate bonds, no-debt real estate, inflation-protected bonds, and foreign bonds. We believe that portfolios with this structure have the ability to take advantage of an economic recovery while providing substantial protection of capital.

Regards,

Wagner Wealth Management