The market has taken a sharp tumble in the past few days.  The S&P has closed at its lowest point since April 14, 1997. This brings the average Large Cap Growth manager and Multicap Growth manager down about 50% on the year.  (We are beating the markets)

The economic news is grim and the Fed believes the recession, which they now recognize, will last into the first half of next year.  Others think the recession will last longer.  Historically the market has turned up about six months in advance of the end of the recession.

Markets are also suffering a lack of confidence.  We have one president with his bags packed and another yet to assert himself.  Obama should act now, or face much tougher problems when he takes office. Treasury Secretary Paulson seems to have a new game plan each day, so it is no wonder that investors are confused.

Is this the end of the world as we know it?  Not likely.  Government regulation, and involvement in business will grow, but the economy will recover.  So far the government has thrown (literally) about 2 Trillion dollars at this problem.  We have seen some results-credit markets are starting to work again-but not all of the results.

The Fed has cut interest rates, and will cut again, probably 50 bp at their December meeting. It takes 6-9 months for these cuts to have effect.

The price of oil has dropped 66%, and that is like a $300 Billion tax cut which is yet to show up in the economy. Home heating oil will be cheaper this winter and gas is $2.00 at the pump; this is good for consumers.

Right now the market is focused on the bailout of the big three automakers, that is the flavor du jour. But when this is over there will be something else to worry about. The long term view is that we will get through this.

There are risks to timing the market, for instance in the last 20 years, (using the S&P index thru October 31, 2008), returns were 247%, but if you missed the 5 best days your returns dropped by half to 139% , and if you missed the 15 best days your returns dropped to 52%.

Since December 31 1969 the three worst months saw declines of up to 22%; one year later the market was up between 32 and 42%.  The worst down month in that period was September 1974 when the market was down a bone crunching 39% for the month; one year later the market was up 38% and for 5 years later, up 118%

Past performance is no indication of future success, and history is just prologue, but it is instructive. I do not know if we have seen the bottom of the market, but your portfolios are defensively positioned; while this does not mean no further losses, if as many believe this is a good time to buy stocks, your portfolios are ready.  Don’t forget our performance ratings by ratings firms rank us near the top of managers in our peer group in the nation, at a time when over 70% of mutual fund managers are underperforming the S&P, and  our performance is risk adjusted, meaning we have a better risk profile.

I encourage you to stay the course, but expect more bumps along the way.

William D. Rutherford