Using the performance of the S&P 500 as a proxy, the US equity market closed the first quarter of 2009 down 11.01%. This will mark the sixth down quarter and the second time in history that the index finished lower for six straight quarters. As we began the new year we saw further declines, hitting a new low on March 9 with the market having declined another 25% since the start of the year. March 9 represented the most recent bottom from which stocks have now rallied almost 18%, with March marking the first positive monthly return since last September. The upward move was powerful and the fact that it occurred in such a short time frame is unusual. In fact The S&P 500 surged 24% over 14 trading days, from March 6 through March 25 on an intra day basis, representing the sharpest sustained gain in stocks since 1938. Foreign equities as a whole fared a little worse than the US Market with the MSCI EAFE index down close to 14% for the year. A diversified fixed income index such as the Barclay Aggregate Bond Index delivered a barely positive return of 0.12% for the quarter.

The most asked question at this juncture is whether a bottom has been formed. Obviously no one can know for sure. The best we can offer is to try to put things in a historical context to get a sense of what might be possible. It appears that we are going through some form of bottoming process. Could we retest the lows? That is certainly possible but not required. Looking back at the last bear market that started in 2000, the bottoming process occurred with three relative bottoms spanning from July 2002 to March 2003, a period of about eight months. This time around, the action is a bit more compressed from a timing perspective and we've just managed through a second relative bottom on March 9 with about four months since the first major bottom of last November. Simply comparing to the prior bottoming process, if we are indeed going through such a process, we tend to conclude that it would be reasonable to expect that this part of the process can take a while longer. We are only four months into it even though it may feel like an eternity. What was particularly notable as we reached a new low in March was that the market internals had actually improved dramatically relative to last November. For example, as we were making a new low on the index, there were a significantly smaller number of stocks making new lows while the volume of advancing relative to declining issues increased significantly multiple times, all indicative of an improving picture not obvious by simply looking at the price movement of the index. We've also observed that historically, a bottoming process of this magnitude has a tendency to lead to strong rallies, possibly buying stampedes.

On the economic front, the US is caught in an adverse feedback loop resulting from the housing collapse, the stressed financial system and the economic slowdown. The declines in housing and equity prices have driven household net worth down sharply. This unprecedented loss of wealth, along with a deteriorating labor market and tighter credit conditions have impacted household spending and driven an increase in savings which may be with us for some time. In light of this uncertainty, firms have scaled back capital spending, which in turn affects jobs and further creates negative sentiment on the household front, which is why this is described as an adverse feedback loop. The deleveraging process is still in progress and will continue to impact our economy as both households and businesses go through a transition toward less debt, more responsible balance sheets and adequate liquidity levels.

On a more upbeat note, policy developments out of Washington and better-than-expected economic data contributed to the recent rally. There seems to be a more constructive tone to the pace of the recession and a few positive surprises or at least less negative than expected data that is suggesting that perhaps a positive inflection point may be closer at hand. The recovery depends foremost on restoring stability to the financial system. Restoring confidence, improving liquidity and protecting solvency in the financial system are all essential to the stabilization process and necessary to lay the proper foundation before we can see any significant and continued improvements. We mention again that the equity markets are a discounting mechanism and will therefore respond ahead of the economy and certainly long before the lagging economic data tells us that things are actually better.

Thank you for the opportunity to help you navigate through these challenging times.