The Quarter In Review, July 2009

By: Jon P. Yankee, MBA, CFP®, AIF®

Hold On, Hold Out… Perhaps the best news we can convey to our clients is that the lows the equity markets hit in the first quarter have not yet been re-tested. Moreover, staying invested in the equity markets has paid off in the first half of 2009. U.S. large cap equities, as measured by the S&P 500 index, finished June with their best quarter in more than a decade. They rallied almost 40% from their March 9th lows through June 12th. Other equity asset classes rallied even more, led by international real estate and emerging markets, and including international equities and U.S. commercial real estate.

Just as encouraging, though, was the fact that, while the markets did not continue this spectacular rally in the last three weeks of June, they did not give up many of their gains either. Flat markets lend more credence and sustainability to the recent rally and thus, the longer that these gains are maintained, the more of an indication that we may have hit the bottom in March. Still, questions remain: Have the markets reflected the depth of the economic recession? What about expectations of inflation and the impact that recent government actions have had on the sustainability of the economic recovery?

Doctor, My Eyes… In looking back on the past nine months and the unprecedented actions that the U.S. government has taken to address the economic and credit crises, we now have the benefit of a little hindsight. One of the most compelling explanations of what we have been through comes from Greg Valliere of the Washington Research Group, who explained at a conference in May that the rally we have just witnessed means “we have saved the patient.” He likens the monetary policy, fiscal stimulus, and financial rescue packages of the past year to the triage that doctors undertake on emergency patients. He notes, however, that while the triage was successful, “there are always complications that arise or set in” as a result.

The issues Valliere is concerned about include the “staggering” budget deficits, re-regulation of the financial services sector, geopolitics, and what he termed the “new safety net.” His biggest concern is the new “attitude” about which companies in what industries will be allowed to fail, and how large a net the Federal Government will cast in trying to save them. In his view, one of the biggest uncertainties the U.S. economy now faces is what our “exit strategies from government programs” are.

Time the Conqueror… Another concern on most of our minds is the possibility of inflation, or even hyper-inflation, rearing its ugly head as a direct result of the easy money policies that have guided the Federal Reserve and Congressional spending. Of course, in economics, we can always argue both sides of an issue, as Robert Samuelson does in Newsweek in June about the competing inflationary and deflationary pressures in the current economy. He makes an important, but sometimes overlooked, point that “the lesson for today is that psychology matters.” Expectations shape behavior and, many times, expectations regarding inflation (or deflation for that matter) become a self-fulfilling prophecy. He suggests that the reappointment of Federal Reserve Chairman Ben Bernanke – whose term expires next January and who has pledged to preempt high inflation – would go a long way toward reducing “needless uncertainty” in the inflation/deflation debate…thus reassuring markets and significantly (and positively) impacting expectations and the psychology of the inflation debate.

Anything Can Happen… Mark Twain once noted that “History doesn’t repeat itself – at best it sometimes rhymes.” Regardless of inflationary concerns, government intervention in the economy and/or markets, or any number of unknown “complications” that the past nine months have delivered, Fox, Joss & Yankee is confident that both the U.S. economy and the “markets” are prepared to weather such uncertainty – and both have seen great challenges and uncertainty before. Our focus with clients continues to be preparing for the unexpected and positioning our clients’ financial affairs to protect from downside exposures, while remaining ready to take advantage of upside potential. We encourage you to continue honestly assessing your tolerance for risk, your appetite for spending, and your ability to save…for a turbulent world in motion calls on us all to be prudent in controlling those things that we can control.