Securian Retirement Services - News & Information

News & Information

The Economy and the Markets
SECOND QUARTER 2008

The economy and the markets hit more bumps in the second quarter, with rising food and fuel prices adding to the challenges posed by slow economic growth. The specter of "stagflation" - an unhappy combination of slow growth and rising prices - returned.

Oil jumped to $140 a barrel by quarter end, up 46 percent so far in 2008. Food costs rose 2.6 percent through May. The core inflation rate the Federal Reserve monitors closely stood at a more stable 2.3 percent, but remains above the Federal Reserve’s 2 percent annual target. Inflation expectations, which can be difficult to lower, have been rising.

The Fed sits between the proverbial rock and a hard place, trying to prevent the economy from stalling out while keeping inflation from running away. In the face of these twin challenges there is little room to maneuver, which is why we think the Fed is likely to keep the Federal Funds rate at its current level for the remainder of the year.

The credit markets continue to work through the aftermath of the subprime blowup. The process of selling off securities purchased with borrowed money during the housing boom continues. The continuing weakness in housing, along with the high volume of assets looking for new owners, means we may be only about halfway through the credit mess. It began about nine months ago, and we estimate it will be another nine months before the market sorts itself out.

The economy continued to suffer job losses, although at a lower level than in past recessions. Exports remain one of the few areas of strength. A weaker dollar is lowering the cost of U.S. goods in foreign markets, even as it fuels inflation at home.

The retail sector has not suffered as much as feared, and it appears tax rebates are having a positive effect. Retailers are cautious going into the second half, anticipating difficult times ahead. Several retailers with business models based on everyday indulgences, such as Starbucks and Cold Stone Creamery, are closing stores.

Stocks

Volatility continued, as the market saw more than 17 days in which the Standard & Poor’s 500 Index rose or fell by 1 percent or more. Natural resources companies were one of the few sectors that performed well. Companies with significant overseas operations also benefitted. Financial stocks continued to suffer as news of additional write-downs and losses continued. Investors appear to be reassessing the long-term profitability of the financial sector, which in recent years has generated historically high returns.

The S&P 500 Index returned -2.73 percent for the quarter, leaving it at -11.91 percent for the year. The Russell 2000 Index of small company stocks fared slightly better, up 0.58 percent in the second quarter and -9.37 percent for the year. Volatility in the equity markets should be expected for the near future, and we believe it is possible stocks could fall further in the days ahead.

Fixed Income

While Treasuries continued to be the best performing segment of the market, we think better opportunities are in sectors where higher yields can dampen the harmful impact of inflation. If the Federal Reserve continues to keep the Federal Funds rates at current levels and inflation persists, fixed income issues with longer maturities are likely to suffer.

For the quarter, the Lehman Treasury Index finished at -2.10 percent, leaving it at 2.23 percent for the year. The Lehman Aggregate Bond Index finished -1.02 percent in the second quarter and is at 1.13 percent for the year.

Real Estate Securities

Commercial and residential real estate continue to travel different paths. Commercial real estate fundamentals overall are not bad and the market in a number of cities, including Seattle, Dallas and San Francisco, is quite good. Hotels and non-mall retail is generally weak throughout the country. Because commercial real estate was not overbuilt, it does not face the same problems as housing. The Dow Jones Wilshire Real Estate Index returned -5.42 percent for the quarter, leaving it at -3.42 percent through the year’s first half.

The residential housing market continues to struggle, and probably has not yet hit bottom. High numbers of foreclosures continue, and there are enough unoccupied homes on the market to equal five quarters of new home construction.

Outlook

Times like these can challenge even the most seasoned investor, which is why discipline and patience are particularly important. Dollar cost averaging - investing a preset amount at regular intervals - can potentially lower costs and help investors avoid the grip of emotions on investment decisions. It is impossible to call the bottom of a market, and many investors have been burned trying. Dollar cost averaging is a strategy that can help lower the likelihood of buying high and selling low.

Even in these periods, value can be found in the market. Patience in waiting for that value to be recognized, in our opinion, will eventually be rewarded.

The S&P 500 dividend-adjusted Index is market-value weighted based on 500 common stocks, which are traded on the NYSE, AMEX and NASDAQ. The weightings make each company’s influence on the performance of this index directly proportional to that company’s market value.

The Lehman Brothers Aggregate Bond Index covers the USD-denominated, investment-grade, fixed-rate, taxable bond market of SEC-registered securities. The index includes bonds from the Treasury, government-related, corporate, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS, and CMBS sectors.

The Russell 2000 Index is designed to measure the performance of the 2,000 smallest companies in the Russell 3000 Index, and represents approximately eight percent of the total market capitalization of the Russell 3000 Index.

Dollar cost averaging does not assure a profit and does not protect against loss in declining markets. Also, since such a program involves regular investment purchases regardless of fluctuating price levels of the investment, consider your financial ability to continue purchases through periods of low price levels.

The Dow Jones Wilshire Real Estate Securities Index is a market capitalization-weighted index of equity securities whose primary business is equity ownership of commercial real estate (REITs). The Index contains equity and hybrid REITs and real estate operating companies (REOCs) and includes reinvested dividends.

You cannot invest directly in an index.

Past performance is not indicative of future results.

Investment risks associated with investing in a real estate fund/portfolio, in addition to other risks, include rental income fluctuation, depreciation, property tax value changes, and differences in real estate market values.

The Economy and the Markets has been prepared for information purposes only and is the opinion of Advantus Capital Management, Inc, a Registered Investment Advisor.

Affiliated with Securian Financial Services, Inc.

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