The Market cracked! A host of problems all seemed to arrive at the same time; Asia, Russia, Brazil, financial unwinding, and Monica Lewinski. What started out as an excellent quarter, quickly turned scary.

The market peaked on July 17 at 9412 on the Dow and 1190 on the S& P 500. By the end of September the Dow was at 7842 and the S&P was at 1017. This is a decline of 16.7% off the high for the Dow and a corresponding 14.6% for the S&P. The lows in the market for the quarter occurred on August 29. September saw some recovery, but then swooned again at the end of the month.

Long-term U.S. Treasury Bonds were the clear winners during this period. Other bonds lagged with the normal spreads widening substantially. U.S. Treasuries were seen world wide as a safe haven from the turmoil in other markets and other currencies.

The strongest quarter of the year was the first quarter. The economy has been slowing since. So far, however, the economy has grown faster than most predictions. The third quarter looks like it will post solid growth. Housing sales have been excellent, chain store sales have been posting good gains, auto sales were good, and the GM strike was settled and thousands of workers came back to work.

The real question is what will happen over the next few quarters. Current economic momentum suggests that at least the forth quarter should continue to show growth in the 2-2 ½% range. What can not be predicted is to what extent the volatile equity markets will affect consumer psychology. In the past the effect has been barely noticed.

Inflation remains low and looks likely to stay at current levels well into next year.

Some economists are predicting a recession in 1999 for the U.S. This seems unlikely to us. What we believe is most likely is a period of very subdued growth.

At the beginning of 1998, we had a positive outlook for the markets with perhaps an 8-10% return. After 3 years of spectacular gains, it seemed unlikely that another above average market move was probable. After the first half of the year it appeared that we had been far too pessimistic. During August and September it looked like our initial outlook might prove to be optimistic. Upon further reflection, our initial forecast still looks reasonable. The negatives have become obvious, but the positives have been overlooked for the moment:

1. Interest rates are at 30-year lows and may go lower.
2. Inflation is low and trending lower.
3. The economy is growing.

Earnings will be the key for each security's performance. We see relatively good values beginning to emerge and we will add equities where appropriate.

The almost panic buying of U.S. Treasury Bonds looks climactic. Long term rates below 5% probably can not hold. The yield on the 30-year U.S. treasury fell to 4.9% at the end of the quarter. The rates on these bonds will probably return to a trading range with 5% at the lower end and 6% at the upper end. We don’t see sustainable long term yields outside of this range. We may also see confidence return to other categories of bonds allowing the spreads to treasuries to narrow. We see better values in these other categories of bonds. Additions to portfolios will focus on these bonds.

Short-term rates are likely to continue to fall. The Fed has already begun the process of lowering these short-term rates and is following other market rates, which have already declined. Look for short-term rates to approach 2% over the next 6 to 9 months. Historically, short-term rates should match the inflation rate and long term rates should average a 3-3½ % over the inflation rate. Real long-term interest rate returns throughout history have remained 3-3½%.

We are pleased with the performance of our equity portfolios during this difficult period. We have always expected and anticipated difficult periods. This one is not unique. All corrections, or even "Bear Markets", result from real and important negatives. The strategy question is always the assessment of long term risks versus potential rewards. We remain committed to our long-term strategies.

Many investors, during the volatile markets we’ve had, lose perspective and commitment to their long term strategies and goals. One of the key ingredients to long term success is consistent application of a disciplined approach.

One of the first inclinations investors have during these times is to become market timers. They rationalize getting out of the market with the belief that they will buy back in at better prices. That almost never happens. In fact, all that usually results is "selling low and buying high". Market timing doesn’t work consistently.

At Riverplace Capital Management, we have decades of experience with a variety of market environments. Our principals have collectively over 100 years of experience. Let us use that experience to grow your capital over time, provide income, protect your capital in down markets, and enhance your returns in up markets. TALK WITH US.

Riverplace Capital Management Co. is an independent, fee only, investment management firm serving individuals, partnerships, trusts, endowments, foundations, retirement trusts, and corporations throughout the U.S. With over 100 years of combined investment experience, the firm provides investment management services tailored to each individual clients needs.