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KENNETH FORD

President & LPL Wealth Advisor 201 798 7992 ken.ford@lpl.com

August 5, 2008

Governments tend not to solve problems, only to rearrange them. ~ Ronald Reagan

The Markets

If you simply look at the trend of our gross domestic product (GDP) over the past three quarters, you might get the impression that the economy is poised for takeoff. But, just like you shouldn’t judge the quality of a bottle of wine based on the beauty of its label, you shouldn’t trust statistics without looking into the details.

Here’s what the GDP trend looks like, according to newly revised data from the Department of Commerce:

Based on the chart, it looks like the economy was weak in Q4, but has been steadily improving since then. On the surface that’s accurate, but let’s look under the hood a bit.

The second quarter included $91 billion of one-time economic stimulus payments that helped boost the consumer spending component of GDP to an annualized growth rate of 1.9%, up from 0.9% in the first quarter, according to The Wall Street Journal. Also, the Journal noted, “Strong export growth is the biggest factor keeping the economy out of recession.” To buttress that point, exports grew 9.2% in the second quarter. But, how long will our strong export growth last? An August 1st Journal article said, “Many parts of the world are slowing down themselves as rising prices take a toll on consumers and businesses.” If export growth slows, that may have a negative effect on future GDP growth.

Yes, we’re pleased to see that the economy grew 1.9% in the second quarter. However, upon further analysis, the number may be a little misleading. Wall Street seemed to agree because on the day the number came out, the Dow Jones Industrial Average dropped 205 points.

Investing is a bit like putting a puzzle together. It takes many pieces to create the whole. In this case, the “under the hood” GDP number is just one of many pieces that help define the state of the economy. We continue to review lots of “pieces” in an effort to do the best job possible for you.

BEAR MARKETS ARE QUITE TRICKY because it’s common to see big “up” days in the middle of a major decline. These up days may convince a naïve investor that all is well and they may dive in, only to discover it was a head fake. The financial sector is a good example. Year to date through July 31, the Financial sector was down more than 25%, according to Bespoke Investment Group. However, if you look at the 10 biggest up days in the Financial sector since 1990, seven of them occurred in 2008. That’s right. Despite the sector dropping more than 25% this year, it still experienced seven dramatic up days.

The Technology sector experienced the same thing. During the 2000 – 2002 bear market, the Technology sector lost 82% of its value, according to Bespoke. Yet, during that horrible period, the sector experienced nine of its 10 biggest up days since 1990.

Just like the GDP trend discussed above, a big up day in the market makes a good headline, but it may not be the “all clear” signal. Nobody rings a bell at the top of a market and nobody rings one at the bottom. Among other things, it takes hard work, patience, and “emotion management” to succeed as an investor.

CALCULATING THE ODDS

The chart to the right illustrates all major stock market corrections that had 15% loss or greater over the last 108 years. Each dot represents a major correction as measured by the Dow.

For example, the bear market that began in 1973 lasted 481 trading days and ended after the Dow declined 45%.

Here are a few items of interest...

• Since 1900, the Dow has undergone a major correction 26 times or one major correction every 4.2 years.
  
• Second, most major corrections since 1900 (64%) have resulted in a drop of less than 40% while lasting less than 400 trading days.
  
• Since 1950, the percentage of major market corrections that were less than 40% and 400 trading days increased to 84%.
  
• As it stands right now, the current stock market correction (October 2007 peak to most recent low) would measure slightly below average in both magnitude and duration.

Breaking the Sound Barrier

A number of people have broken the sound barrier, either in a super-fast car, or in nice fancy planes.
However, hundreds of years ago it was broken on horseback. How?

Click here for the answer.

Thanks for your trust & confidence,

* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
* The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks.
* The Nasdaq Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Consult your financial professional before making any investment decision.
* You cannot invest directly in an index.
* Past performance does not guarantee future results.