Company News
Market and Economic Commentary - December 2011
Since our last communiqué, investment markets have bounced all around making analysts dizzy and investors nauseous. The S&P 500 declined 12.07% in August and September only to rebound 10.93% in October. Most of the volatility can be attributed to the sovereign financial troubles in Europe, specifically Greece and Italy and the potential repercussions of an uncontrolled default. Because of this political and fiscal instability, risky asset correlations have increased dramatically as high quality and low quality assets have moved in tandem. When investors have fled risky assets they have flocked to US Treasuries as a safe haven. Any active bond manager that underweighted treasuries more than likely underperformed their respective benchmarks.
European leaders have had a difficult time agreeing on a method/process/vehicle for rescuing troubled nations from their sovereign debt burdens. Subsequently, daily investment market performance hinges on what is transpiring in Brussels, Frankfurt, Paris, Athens and Rome. It appears the US Federal Reserve has tired of bickering and may take a more active roll in ensuring the European problems don’t infect the US. This was evident by their coordination of other world central banks easing of US$ swap rates. Eventually the European Central bank will have to realize that deflation rather than inflation is their primary concern and will lower lending rates.
Over the last several years I’ve been a Negative Nelly on our economy and financial markets. And until recently, most prognosticators have disagreed. My opinion began to change over the summer as economic data deteriorated, but not as much as would be expected given the tragedies of the Japanese tsunami and Taiwanese floods and sovereign debt issues in Europe. Recent economic data seem to confirm my suspicions that the US will not double dip and growth will be moderate but not spectacular. This slow growth scenario while significantly better than Q1 2011 will not be sufficient to dramatically improve our employment problems. Although, the unemployment rate has dropped to 8.6% recently, the labor force participation rate had also dropped. This implies fewer people are looking for jobs due to frustration or ultimate retirement. Therefore, GDP should chug along at a 2-2.5% clip for the next several quarters unless the European situation is resolved or employment picks up dramatically.
Portfolios are still positioned at the low range of allowable equity exposure. Even though equities are currently attractively priced, macro issues around the world prevent us from committing more money to that asset class. Fixed income allocations are underweight treasuries given the unattractive yield environment. Investment grade and high yield corporate bonds are of better value, especially after spreads widened over the last quarter. We continue to look for opportunities to tactically allocate portfolios to achieve an efficient return given the current range bound market.
Today, our politicians on both sides of the isle seem to pledge allegiance to their political party rather than our flag. Our future financial landscape is no longer determined by the collective efforts of our citizenry, but by our so called “leadership” in Washington DC and other capitals around the world. This new political risk is relatively new for the developed world and is typically associated with emerging economies. We need to ask our representatives to place public interest before political planks and to remember they represent people not parties. In the coming year, I pray we elect people who will listen more than talk and who are willing to compromise for the good of the country regardless of their party affiliation.
“The English language has some wonderfully anthropomorphic (any attribution of human characteristics to animals) collective nouns for the various groups of animals. We are all familiar with a Herd of cows, a Flock of chickens, a School of fish and a Gaggle of geese. However, less widely known is: a Pride of lions, a Murder of crows, an Exaltation of doves and, presumably because they look so wise: a Parliament of owls. Now consider a group of Baboons. They are the loudest, most dangerous, most obnoxious, most viciously aggressive and least intelligent of all primates. And what is the proper collective noun for a group of baboons? Believe it or not ……. a Congress!”
We at Broad Street wish you and yours a Merry Christmas and a Happy New Year. As always, please give us a call if you have questions or concerns.