Serials by Kellogg

Over the next 12 months, the U.S. stock markets should have an average return of between 12% and 14% but with volatility (price fluctuations) in the range of 33% to 41%. With this extreme range of volatility the market could range from –20% to +50%.

This is an unusual year in that it is both an election year and a year of Federal Reserve (Fed) tightening of interest rates. We expect a quiet summer but with further softening in the stock market from August through October possibly triggered by an expected interest rate increase by the Fed in August. Overall the markets should remain choppy (up and down with no clear trend) until both of these events are completed.

Despite all the excitement earlier this year about new versus old economy, the typical technology mutual fund was up only 3% during the first half according to Lipper, Inc., a mutual fund tracking firm. The better performing sectors were Health Care/Biotech, Real Estate, Natural Resources (Crude Oil/Energy) and Small Cap stocks. Your Plan had most of these throughout the various portfolio choices.

No one knows what will be the best performing sector over the next 6- or 12-month period; therefore, your best approach is to stick with your long-term investment objective, rely on your Portfolio’s built-in diversification and try not to over-manage from a short-term viewpoint.

A good example of short-term volatility are the market swings of two fast growing sectors: Health Care and Technology, which have had very high annualized returns of 21.4% and 34.8%, respectively, for the last 5 years. During the first six months of 2000, Health Care was the best performing at 37.6% but, this time last year, it was down –1.0%. This time last year the best performer was Technology at 35.7% but now it is up only 4.1%. The risk of trying to time these swings doesn’t really buy you that much more return given each sector’s strong growth trend and the length of time you need to be invested before retirement.