Performance UpdatesMarket Commentary
Homestead Funds portfolio managers report on the investment climate, economy and asset class performance. For more information, refer to the most recent annual or semi-annual report.
September 17, 2008
The stock and bond markets have been experiencing a high level of volatility as problems that began in the sub-prime mortgage market over a year ago have spread to the financial sector. There are additional factors weighing heavily on investor confidence, specifically indications that a global economic slowdown may be underway and a weak near-term outlook for corporate profits.
Understandably, this high level of volatility is of concern to investors and we wanted to share our view of the situation.
Generally, we are experiencing a widening of what was initially thought to be an isolated problem—risky mortgage loans made to less-creditworthy buyers packaged as investment securities and sold to investors. As the value of these securities declined precipitously, the large investment banks and insurance companies holding them took substantial losses. The federal government took steps to make capital available to these entities as appropriate, but some companies continue to struggle to find borrowers or buyers in order to remain in business. Among the largest holders of sub-prime mortgage debt were Fannie Mae and Freddie Mac, two government-sponsored corporations that were, as a result of this crisis, placed into conservatorship and now overseen by a new regulator. AIG recently received a loan from the federal government, secured by the company's assets.
It will take government policy makers, regulators, Congress and businesses time to resolve the many pieces of this complex puzzle. As investors, we note that these important tenets have held firm:
Diversification works. For the year-to-date period ending September 16, 2008, the Standard & Poor's Financials Index declined 29.77%, while the more broadly diversified Standard & Poor's 500 Stock Index posted a lesser decline of 16.07%.
Bonds can help offset risk. A balanced portfolio of 60% stocks and 40% bonds (as represented by a blend of the returns on Standard & Poor's 500 Stock Index and the Merrill Lynch U.S. Corporate, Government & Mortgage Index) posted a year-to-date return of -8.42% through September 16.
All investments entail risk. The financial markets are inherently cyclical—serving up losses as well as gains. Volatility can serve as a reminder to make decisions based on your goals and risk tolerance, in addition to any investment's potential for return.
If you have additional questions about current market conditions and how they might impact your account, we welcome you calls. Representatives are here on weekdays from 8:30 am to 5:00 pm, ET. Please call 1-800-258-3030.
We appreciate your continued trust and confidence.
Six months ending June 30, 2008
In the first half of 2008, stock and bond markets continued to feel the pressures of a softening economy, further decline in home values, rising pace of foreclosures and soaring prices for oil and other commodities. The credit crunch, sparked by companies' exposure to sub-prime mortgage-backed securities widened, with banks, mortgage companies and insurers announcing large write-downs in the value of the mortgage-backed issues held on their balance sheets and having to raise capital to shore up reserves.
In March, with the investment bank Bear Stearns on the verge of collapse as a result of its exposure to sub-prime investments, a situation that would have had severely negative repercussions for the financial markets worldwide, the Federal Reserve worked to organize a speedy buyout offer from JPMorgan Chase. The Fed's monetary policy unit also took steps to improve liquidity during this six-month period, announcing further reductions in its target for the federal funds rate and by making additional funds available to banks.
Major stock market indices retreated in the range of 12% to 14% for the first six months of 2008.
Since the close of this reporting period, oil prices have backed off from their peak levels and the value of the U.S. dollar relative to other currencies has rebounded. These positive developments have helped spark some recent short rallies in stock prices, but it is too soon to say that conditions have improved sufficiently to support an extended advance.
The financial markets' zigs and zags can serve as a reminder to check your overall asset allocation. A Homestead Funds' representative can help you keep your portfolio in line with your financial goals and risk tolerance. Please give us a call at 1-800-258-3030 between the hours of 8:30 am and 5:00 pm, ET.
