Trust Services

Beacon of Hope

The third quarter of 2008 was extremely challenging for investors, and many clients are understandably nervous.  The government stepped in and established a conservatorship to oversee Fannie Mae and Freddie Mac. Bank of America made a deal to acquire a troubled Merrill Lynch.  Lehman Brothers filed Chapter 11 bankruptcy, and the subsequent crash in the value of their debt instruments caused New York-based Reserve Primary money market fund to “break the buck.”  There were several bank failures, including the largest bank failure in United States history – Washington Mutual.   The financial services industry as we knew it is undergoing a dramatic metamorphosis and it remains to be seen how the new system will look or function.

When any bank fails, it can naturally cause other people to question whether their bank is safe.  By extension, clients may wonder what happens to their investments if something did happen to the bank.  Trust clients should know that their assets are separate from those of the bank as required by federal mandate.  So even if a bank fails, the assets are the property of the account and can be moved to another institution.  However, while the assets are set aside for client ownership, the market values of those assets are not guaranteed.  Our clients should also be aware that we are comfortable with our various money market exposures and do not anticipate any adverse impacts.

Equity markets were punished in this crisis, as the S&P 500 Index plunged 8.36% for the quarter.  Energy and materials sector stocks took the brunt of the sell off, while the less cyclical consumer staples and health care sectors fared best.  Bond performance was mixed, with the Lehman Brothers Intermediate Aggregate Index returning -0.13% for the period. Treasuries and government agency debt naturally reaped the greatest benefit from the flight to quality; corporate bonds, particularly finance issues, produced negative returns.

As the broader stock and bond markets were affected, so were our equity and fixed income strategies.  The Investment Committee met several times throughout the quarter, reviewed the current portfolio strategy, and made minor adjustments in conjunction with portfolio rebalancing.  We believe that good investment managers should remain poised and that our discipline will prevail.  Selling into a down market locks in losses and reduces the likelihood of participating in any subsequent rebound.  While others may have elected to assume excess risk in the pursuit of quick profits, we continue to manage our clients’ accounts as we always have – by taking the long-term view, establishing an appropriate asset allocation, and maintaining adequate diversification. 

The Federal Reserve and the Treasury Department have responded to the financial crisis in ways both unprecedented and innovative.  Additionally, Congress has moved quickly to enact legislation to mitigate further stresses on our financial system.

The First Commonwealth financial professionals remain committed to providing you with superior service and investment management.  The landscape is changing rapidly, but we continue to monitor events as they unfold and stand ready to take appropriate actions.  In the near term, we anticipate ongoing market volatility driven by the fragile financial sector, weak overall economic conditions, and a corresponding lack of investor confidence.  Looking beyond the present downturn to the road ahead, we expect to emerge into an environment of greater oversight and controls as the economy returns to a mode of modest growth.

As of Market close Tuesday September 30, 2008