A Great Spring Rally, What Comes Next?
May 27, 2009
It has been an amazing rally this spring. Beginning in early March, global equity markets have rallied into positive territory for the year. The initial spark was provided by comments of profitability, in the U.S. banking industry. This was followed by the announcement of additional Federal Reserve programs and clarity from the U.S. Treasury on how toxic assets would be put back in play and valued. Also, data starting showing signs of stability. Earnings season was ugly but less ugly than forecast.
Now that stock valuations are reasonably fair, what comes next? It is next to impossible to predict the short-term direction of stock markets. Even with the impressive rally the major benchmarks are far below their levels of one year ago and full recovery is still likely some time off. Nonetheless it is not too far of a stretch to suggest the path in the immediate future will be ever more dependent on confirmation that stability in the economy is at hand and the worst of the recession has passed. If the next several months fail to deliver this confirmation, the markets will likely fall under pressure once again so being overly aggressive at this juncture could prove to be short-sighted unless you are prepared to quickly cut losses. The global economy and the U.S. as a nation still have many challenges ahead so tempering expectations to recognize the potential pitfalls remains prudent.
Outside of global equity markets, credit markets have also made steady progress this spring. In some respects this is actually more important than the rally in stocks. Collapsing credit markets were on the front end of the financial crisis and their full recovery is necessary for full recovery in the real economy. The sharply upward sloping yield curve will improve loan profitability. Tightening credit spreads with deeper liquidity provides some confirmation that the Federal Reserves can eventually return to the sidelines. Commodities have also moved higher in anticipation of positive growth and volatility has come down to pre-Lehman failure levels. All of this suggests that for now some degree of normalcy (whatever the new definition of normal is) has returned to the markets.
Overall we are pleased with the developments. Since the beginning of the year diversification has worked well. We’ve have taken the opportunity where we believe necessary to shore up portfolio allocations and provide increased investment in low or negatively correlated asset classes as an insurance policy against future market disruptions be they immediate or months away.
As always, we will continue to closely monitor market risks and opportunities and provide personalized and customized guidance to help you achieve your financial goals.
Jack E. Payne, CFA
Chief Investment Officer
Michael Joyce, CFA, CFP
President & CEO