The following special market update was emailed to our clients on Friday, June 17th:
Like the famous morning alarm clock scenes in the movie “Ground Hog Day,” we keep waking up to the same themes being replayed in the markets. Greece on the verge of default, possible contagion to other European countries, a weak U.S. job market, the economy growing slower than we had hoped. All these themes caused the stock and corporate bond markets to correct very sharply in May and June of 2010.
Here we are, one year later, and very little has changed except that the markets’ 2011 correction has been milder so far. But a significant measure of daily volatility has been re-introduced to the stock and bond markets. For a bit of perspective, the U.S. stock market (as reflected in the S&P 500) is down about 7% since its peak on April 29th of this year. Last year, the same index peaked on April 23rd and dropped 16% before bottoming on July 2nd.
The only new concern is that the Federal Reserve’s second round of quantitative easing (buying Treasury bonds for its own balance sheet, which adds liquidity to the economy) is about to end and there is little likelihood it will be extended in its current form. However, we think this should be more of a market concern than an economic concern as the evidence is clear that the Fed’s program had relatively little economic impact.
We continue to believe the U.S. economy will grow at a below average rate, unemployment will stay very high and corporate profits will stay pretty solid. The moderate fall in oil prices will ultimately put some money back in consumers’ pockets and lift spending a bit. While we don’t expect a recession in the near term, a slower growing economy has far less margin for policy error or shock absorption. Lack of consumer confidence, if translated to buying habits, can constrain the economy as well. Finally, we are heading into the presidential election cycle when we will see a barrage of talking heads telling us how poorly we are doing. This never helps an already weak economy.
From an investment perspective, we continue to focus on the opportunities we see in individual stocks, carefully selected mutual fund and hedge fund managers and closed end fund special situations. The market corrections have created some good values and we expect to take advantage of short-term dislocations to your benefit. Of course, risk control is always top of mind each time we evaluate these opportunities for your portfolios.