Commentary
Economic and Market Outlook
Economy and Interest Rates:
- Led by the inventory cycle,”cash for clunkers”, government spending and the elimination of the housing drag, GDP increased at a 2.2% annual rate in the 3rd quarter. It was GDP’s first increase since Q2 of 2008.
- With the government and the Fed slowing pulling back their stimulus programs, we expect modestly slower GDP growth over the next few quarters in the 3-3.5% range.
- Unemployment, a lagging indicator, is 10.0% , however employment growth may surprise to the upside due to corporations’ significantly cutting labor costs in 2008-2009.
- Neither inflation nor deflation will be an issue in 2010 as massive government stimulus is offset by the great unwind of world wide de-leveraging and the amount of excess capacity in the economy.
- Core inflation remains within the Federal Reserve’s target range of 1-2%.
- The Fed Funds and Discount Rates are at .25% and .50%, respectively. We believe the Fed will maintain an easing bias until the economy mounts a sustained recovery and overall employment improves.
- Treasury yield curve is steep with a significantly large spread between 2 year and 10 year paper; while Agency and corporate bond spreads remain at relatively high levels.
Equity and Bond Markets:
- The stock market made significant gains in 2009 with lower quality stocks(C&D rated) dramatically outperforming the higher quality(A&B rated) names.
- In order to maintain a sustained market rally, the focus will be on credit issues and improving corporate profits driven by top line sales growth.
- Should the dollar continue to weaken, this will provide support for large developed international stocks.
- Global central bank and Government intervention along with the Fed’s process of “quantitative easing” will keep rates relatively low. However, the Fed has announced it will eventually eliminate it’s purchase of Mortgage and Government securities (quantitative easing) in 2010 in order to smooth the transition for the markets.
Asset Allocation:
- Favor Large Cap Value and Large Cap Growth equally with an emphasis on high quality and decreasing exposure to small cap and mid-cap stocks. Continue to diversify using international stocks and emerging markets in portfolios.
- We recommend high quality corporate bonds and government guaranteed securities in the short- intermediate maturity range. Emphasize high quality municipal bonds which are attractively priced.
- Consider alternative investment strategies to reduce volatility and provide absolute return.
- Revisit your overall investment objective to determine if it meets your time horizon, liquidity needs, and risk tolerance.
YTD Benchmark Total Returns Through 12/31/2009:
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