The capital markets greet September with many questions. But whatever perils or opportunities await, the year-to-date tally doesn’t look all that bad.
August was a rocky month, but the bulls remain the dominant species on Wall Street. That may change, of course, but for the moment the numbers speak for themselves. Everyone’s favorite benchmark–the S&P 500–is up 5.2% on a total return basis in 2007 through August 31. Not bad, if you consider that on an annual basis that represents above-average performance.
In fact, the major asset classes are still bubbling in 2007. Some may be battered a bit after August’s slings and arrows. But the upward bias appears intact on a collective basis. That’s not to say that smooth sailing’s assured for the remainder of the year. But one can at least look at the trailing numbers and dream.

Consider that a standard 60/40 portfolio mix (60% U.S. stocks/40% U.S. bonds) is up by 4.2% on a total return basis this year through August 31, as our chart below shows. That’s in line with the gain from a portfolio that equal weighted the major asset classes at the end of each month. Equal weighting isn’t necessarily a superior strategy, but it’s a useful benchmark for suggesting what’s possible for diversification-minded investing.
The equal weighted portfolio is comprised of the following:
* Cash (3-month T-bill)
* U.S. stocks (Russell 3000)
* U.S. REITs (DJ Wilshire REIT)
* U.S. Bonds (LB U.S. Aggregate)
* Inflation-indexed Treasuries (LB U.S. TIPS)
* U.S. high yield bonds (iBoxx HY)
* Foreign developed mkt stocks (MSCI EAFE)
* Emerging mkt stocks (MSCI EM)
* Commodities (DJ-AIG Commodity)
The question, of course, is can the upward momentum continue? Much will depend on how the economy fares. There’s a fair amount of debate as to whether the mortgage troubles will spill over into the general economy. We don’t have a better guess than anyone else, but we can look backward with clarity and observe that the growth machine is looking weary.
Consider our proprietary index of economic indicators, which we call the Capital Spectator Economic Index, which you can see below. It’s an equal weighted mix of 13 leading, coincident and lagging indicators (see list at bottom) that, we believe, offer a broad measure of economic activity. The calculation is such that a rise in the index reflects growth. But as you can see, the CS Economic Index (updated through the end of July) is looking sluggish. It managed to eke out a small gain in July, but the upside action of late pales to the good old days of past years.
Yes, the Fed may be able to pull a monetary rabbit out of the hat, but the trick doesn’t impress as it used to. Adjusting interest rates is a potent tool, but it’s one prescription and it doesn’t cure every ailment under the sun. Still, don’t underestimate Bernanke and company. And as Mr. Market’s action so far this year suggests, hope of one more home run (or at least a single or double) can’t be dismissed yet. Nonetheless, it may be later than it appears if you’re looking exclusively at trailing data.
CS Economic Index components:
Avg weekly hours of prod workers
Total nonfarm payrolls
S&P 500
Money supply
Interest rate spread (10yr Treas – Fed funds)
Mfg’s new orders (advance)
Housing Starts
Disposable personal income
Personal Consumption Expenditures
Industrial production
Retail sales
New home sales
University of Mich Consumer Sentiment