In this treacherous environment, one asset class seems to be the target of central banks-currencies. As the system is flooded with liquidity and faced with low interest rates that are likely to get even closer to zero, currencies are naturally being devalued. Plunging commodity prices have played their role as well. Currently, Treasuries and inflation-linked bonds are priced assuming no inflation for the next five years. With that mindset, there is little justification for the Fed to restrict liquidity.

As cash loses its status, progressing slowly from king to pawn, other asset classes will make swift gambits to take the mantle. Corporate fixed income and common stock is simply too cheap to languish indefinitely. The slightest whiff of good news is likely to send valuations higher.

The big loser in this transition will be Treasury bonds. With the 10-year note currently yielding a smidge over 2%, investors will run for the exits in favor of higher returns. The exodus may be brief, but it seems to be the most likely path for asset classes in the first quarter.

The Monthly Index Report for January 2009

Index

Dec-08

QTD

YTD

Description
S&P 500 Index*

0.8%

-22.4% -38.5% Large-cap stocks
DJIA*

-0.6%

-19.1%

-33.8%

Large-cap stocks
Nasdaq Comp.*

2.7%

-24.3%

-40.5%

Large-cap tech stocks
Russell 1000 Growth

1.8%

-22.8%

-38.4%

Large-cap growth stocks
Russell 1000 Value 1.4% -22.2%

-36.9%

Large-cap value stocks
Russell 2000 Growth

5.4%

-27.4%

-38.5%

Small-cap growth stocks
Russell 2000 Value

6.2%

-24.9%

-28.9%

Small-cap value stocks
EAFE

6.0%

-19.9%

-43.1%

Europe, Australasia & Far East Index
Lehman Aggregate 3.7%

4.6%

5.2%

U.S. Government Bonds
Lehman High Yield

7.7%

-17.9%

-26.2%

High Yield Corporate Bonds
Calyon Financial Barclay Index**

2.0%

9.2%

13.4% Managed Futures
3-mo. Treasury Bill*** 0.0% 0.3%

2.5%

All returns are estimates as of December 31, 2008. *Return numbers do not include dividends.

** Returns are estimates as of December 30, 2008.