Asset Financial Services
Author Brenda Bagonis-Cooke

Third Quarter 2006 Newsletter

Economy

The Fed left interest rates unchanged, citing a slowdown in economic growth and moderating inflationary pressures. The Index of Leading Economic Indicators declined during the quarter, indicating that the slowdown should continue into 2007. The Fed’s pause was validated by a sharp decline in energy prices that led to a tame inflationary report. The U.S. housing market continued its rapid decline with housing starts dropping nearly 20% from last year’s levels. Prices of existing homes declined for the first time in 11 years, as supplies jumped to 13-year highs. The job market remained on very strong footing, as jobless claims appear to be stabilizing at historically low levels. Falling gasoline prices fueled a larger than forecasted rebound in confidence among consumers, after reaching a 2006 low in August. The increase in confidence indicates the resiliency of the U.S. consumer, and may forecast continued support for the overall economy despite the recent signs of moderation.

Capital Markets

Stocks and bonds rallied in September amid signs that the economy is nearing a “soft landing”, and the expectation that the Fed may begin to ease monetary conditions in the upcoming year. The Dow Jones Industrial Average flirted with record highs and the NASDAQ continued its rally that began in mid-July. Growth stocks outperformed value stocks for the second consecutive month, after significantly lagging for much of the year. Large cap stocks outperformed in September and for the third quarter overall, as investors exceedingly looked towards well-established companies to help navigate the economic slowdown. This trend is expected to continue into 2007. The energy and utilities sectors posted negative returns in September, as a result of rapidly declining commodity prices. Technology stocks on the other hand have recently begun performing much better. International stocks continue to perform well, although emerging markets cooled somewhat in September, primarily as a result of declining commodity prices. The U.S. Treasury rally continued in September, as bond investors welcomed signals of economic moderation, and another FOMC meeting where the Fed left rates unchanged.

For the third quarter, the S&P; 500 was up 5.7%, the DJIA up 5.3%, the NASDAQ up 4.0%, and MSCI EAFE (international index) was up 3.9%. In addition, the Russell 1000 (large-cap) was up 5.1%, the Russell Midcap was up 2.1%, and the Russell 2000 (small-cap) was up 0.5%. Also, the Lehman Brothers Aggregate Bond Index was up 3.8%.

Legislative Issues

In August, Congress enacted major pension reform, the Pension Protection Act of 2006. This new legislation makes permanent retirement plan and IRA contribution limit increases that were set to expire after 2010. In addition, “catch-up” contributions for workers in retirement plans and IRAs, who are age 50 and older, will continue to be available. The new law also makes permanent the federally tax free status of qualified withdrawals from 529 college savings plans.

Administrative Issues

As always, should you have questions regarding fund choices, market conditions, appropriate investment allocations, etc. please contact our offices for any assistance on your accounts.

Brenda Bagonis-Cooke 215 491-4346