February 1, 2007

Don't Count Out Bonds (Yet)

Searching for Alpha, the monthly index newsletter for February 2007

It was a rocky start for commodities in 2007, and oil was no exception. Crude prices fell precipitously in the first few weeks of January, scoring a 19-month low at around $50 per barrel, before rebounding after OPEC announced a number of production cutbacks.

Although the Treasury market followed energy prices lower throughout the month, that correlation isn't likely to continue indefinitely. If commodities keep declining in price, inflation pressure will subside, a view that the Fed expressed in its policy statement released January 31.

A combination of stifled inflation anxiety and solid economic growth is as good as it gets for investors. However, it should be noted that any deviation from the good news that market participants have gotten so used to expecting could result in a painful correction in the equities markets. In that scenario, fixed income will likely prove to be an effective portfolio stabilizer.

The Monthly Index Report for February 2007

Index

Jan-07

QTD

YTD

Description
S&P 500 Index*

1.41%

1.41%

1.41%

Large-cap stocks
DJIA*

1.27%

1.27%

1.27%

Large-cap stocks
Nasdaq Comp.*

2.01%

2.01%

2.01%

Large-cap tech stocks
Russell 1000 Growth

2.57%

2.57%

2.57%

Large-cap growth stocks
Russell 1000 Value

1.28%

1.28%

1.28%

Large-cap value stocks
Russell 2000 Growth

1.86%

1.86%

1.86%

Small-cap growth stocks
Russell 2000 Value

1.50%

1.50%

1.50%

Small-cap value stocks
EAFE

0.68%

0.68%

0.68%

Europe, Australasia & Far East Index
Lehman Aggregate -0.04%

-0.04%

-0.04%

U.S. Government Bonds
Lehman High Yield

1.12%

1.12%

1.12%

High Yield Corporate Bonds
Calyon Financial Barclay Index**

1.76%

1.76% 1.76% Managed Futures
3-month Treasury Bill

0.47%

All returns are estimates as of January 31, 2007. *Return numbers do not include dividends.

** Returns are estimates as of January 30, 2007.

Ben Warwick is CIO of Memphis-based Sovereign Wealth Management. He can be reached at ben@searchingforalpha.com.

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