3rdQuarter 2011 Client Commentary
Dear Valued
Client:
The Third Quarter saw a continuation of many of the challenges we discussed at the end of the Second Quarter. A looming default of US debt was resolved, only to be followed by a downgrade of US Debt by Standard & Poor’s. Europe continues to struggle with how to help Greece avoid default, or at least how to soften the landing if they do, and now has to deal with a credit downgrade of Italy, and potential bait out for Belgium’s largest bank. Consumer Confidence has plunged in the US, fueled by stubbornly high unemployment, and the overall economy seems to have slowed almost to a stop. All of these have sparked a ‘flight to quality,’ as investors move out of risky assets, regardless of their character, to move to the safety of US Treasuries, almost to spite S&P’s downgrade. This has pushed interest rates even lower, contrary to everyone’s expectations, and caused sizeable drops in the equity, real estate, and commodity markets.
We know that these events are troubling. Further, we understand that they are, in many of your minds, conjuring memories of 2008. Your fears are not without merit, although we do not feel this is the time to panic. In the words of DoubleLine Capital CEO Jeffrey Gundlach, we are “straddling the extremes of two potential outcomes. A ‘hurricane’ may hit, in the form of a blow-up in Europe or a move to put the US Federal Government on an austerity program, driving prices lower, or world economies will plod along, in that case [the current] optimistic pricing makes sense.” Although we are fairly certain that Greece will default, in spite of the best efforts of the rest of Europe, the impact of that is not in any way certain. One of the key differences from 2008 to today is the very fact that everyone expects Greece to default. Every investment market is a forward looking instrument, and when everyone expects something in the future, it gets priced in today. One of the reasons the market reacted so dramatically to the events of 2008 was that they were unexpected.
There are also still causes for optimism. According to Ben Warwick, CIO of Aspen Partners, “More U.S. stocks are paying dividends that exceed bond yields than at any time in the last fifteen years, as profits rise at their fastest clip in two decades…. Even as the economy is slowing down, these firms have been able to increase productivity and expand profits.” If this trend continues, and it seems to be likely that it will, then eventually markets will improve and investors find more opportunities there than in ‘safer’ assets. Also, according to Dr. David Kelly, CFA, Chief Market Strategist for J.P. Morgan Funds, while consumer confidence remains low, “September numbers on auto sales, chain-store sales, payroll employment and manufacturing all suggest that this plunge in confidence has not pushed the economy into recession….Indeed, it now looks likely that real GDP growth was stronger in the third quarter of the year than in either of the first two quarters.”
So, given this contest of extremes, we continue to suggest an approach that balances these two potential outcomes is the best course of action. We continue to encourage you to consider your short-term needs, whether planned or emergency, and make sure you have adequate reserves to weather potential choppy markets in the near term. On the other side, we will continue to manage your long-term portfolio with the same investment discipline, rebalancing as the opportunity presents itself, ensuring that you will benefit from the recovery when it comes.
We will continue to monitor the changing environment, and make whatever adjustments we deem necessary to keep you on track, keeping you informed of our thoughts through various forms of communications, so that you know we are still here, calmly manning the helm.
As always, we thank you for your ongoing confidence in Comprehensive Investment Solutions®, LLC, and look forward to continuing to help you with your ongoing financial needs.
Sincerely,
Thomas N. Alvaré, CPA/PFS
President
Robert M Vogel, CFP®
Chair, Investment Advisory Committee
Ryan Barrett, CFP® William T. Reynard, CFP®
Financial Advisors