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Trust Department Quarterly Newsletter 3rd Quarter 2008
Who's Better in the White House? With only a short time before Americans elect our next president, we wanted to look back and share some observations on how much difference it makes which party is in the White House. The main concern on voters’ minds as we select our leaders for the next four years is the state of the economy and which party’s promise of “change” will get us out of our financial problems. As we enter the fourth quarter of this election year, Congress is wrestling with a revenue package to help stabilize the financial markets. Confidence in the stability of investments has been battered by the failure of Lehman Brothers, the decline of Washington Mutual and Wachovia, and the partial takeover of Fannie Mae, Freddie Mac, and AIG by the government. The 700 billion dollar economic stabilization package is projected to provide some confidence in the financial markets by taking over a certain portion of the sub prime mortgages and allowing financial institutions to free up funds so that money is available for new loans. Our economy grinds to a halt when companies and individuals cannot borrow money to carry on business as it has been for hundreds of years. The stabilization package will not solve all of our problems, but it will help American’s confidence and free up funds to allow our economy to function. Historically, family income growth has increased more over the last 60 years when a Democrat was in the White House. Inaugural years when a Democrat is in office have been better for the equity markets than the same first year of a Republican president. Over the last 74 years the S & P 500 Index has shown an average increase of 11.2% with dividends added in. The best and worst returns in the S & P 500 occurred when Franklin D. Roosevelt (Democrat) was in office, with over an 80% return in 1936 and a negative 38% return in 1938. In 74 years since FDR there have been only 12 years when the equity markets had a negative return, six with each party in control and only two of those happening in the last 30 years, excluding the year 2008. Of the years that the market was positive over the last 74 years the average return on equities has performed on average 2% better when the Democrats were in office. However, this number is skewed by the first term of FDR. If we back out those four years the Republican Party wins this average return by about ½ of 1%. So historically each party has had its good and bad years. We are in one of the worst financial problem periods in history and we hope the wisdom and courage of our elected officials will lead us back to stability and confidence in the American way. The Stock Market Through the end of September there have been 37 trading days during 2008 when the market has moved one way or the other by more than 2%. Four of the worst loss days that have occurred in the last 50 years took place in September of this year. It is very hard to talk positive about an equity market that is down 23% over the last 12 months. But even after the large decline of over 700 points on September 29th, the buyers came in the following day and drove the market up 485 points. Warren Buffet, who endorses the government bailout plan and sees the U.S. making money on this over time, has been investing in troubled stocks, such as General Electric and Goldman Sax. The Bond Market The Federal Reserve made no moves with the discount rate at its most recent meeting. There has been some indication that the next move would be to raise interest rates. However, in view of recent concerns with the financial markets and the inability of many firms to borrow it is anticipated that there probably will be no change in the near term. We have actually seen market interest rates decline slightly during the last quarter as more money has gone out of the equity markets and looked for safe investments such as U.S. government bonds. We do not see interest rates making much of a move during the balance of this year with interest rates increasing as we go into the year 2009. Thought For the Day “The only limit to our realization of tomorrow will be our doubts of today.” Franklin D. Roosevelt |
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