Recession Worries

Whether the US economy is in a recession by technical definitions (the US 1st quarter GDP was recently revised upward, to a modest, but positive 1%), it certainly feels that way. And certain industries (autos, airlines, residential real estate sales and construction, and many areas of financial services beyond just mortgage lending) are in deep distress. With the exception only of some fixed income classes and commodities, investment markets around the world are reflecting a broad sense of gloom.

After what looked like a strong recovery in April and May, June, especially in its final days, delivered very deep one month declines in most asset classes to produce an overall loss this quarter for most client portfolios.

This was in response to a combination of disturbing factors: a weak dollar, an unprecedented price for oil, increasing inflation pressures, and the still unresolved crises in mortgage and other debt. In addition, the Federal Reserve’s recent decision to halt rate reductions frustrated both those investors looking for further economic stimulus and those hoping for rate increases to stem incipient inflation.

In our last two editions, we commented at length on the genesis and impacts of this debt crisis. We wish we could now say that it is behind us. We have no such assurances to offer. Some insightful commentators are suggesting that about half the loan defaults have yet to surface. The steep losses suffered in the market values of financial stocks reflect this concern but may have already discounted even more than the actual losses still to occur.

In an article to follow, Jason Thomas, our Chief Investment Officer, discusses the other giant story of the past months, oil. We explore whether we are in a commodities price bubble and what consequences we can expect for our clients. Those clients with small current commodities exposures (and those with substantial fixed income exposures) have enjoyed portfolio results generally a good deal better than the headline grabbing declines of major market indexes.

But even more important in producing respectable results in the face of market volatility and price erosion has been the broad and extensive asset class diversification of clients’ portfolios. Greg Schick and Sam Lee share some thoughts below on how our initial coaching of clients toward that investment strategy and our ongoing discipline about maintaining that targeted diversified exposure is a crucial aspect of the management services we bring to our clients’ portfolios. This is especially valuable in negative market environments such as we’ve experienced in recent quarters. That portfolio strategy discipline, even though sometimes difficult to maintain when market psychology turns sour, is essential in order to enjoy the market recoveries that always have, and fundamentally must, occur.

That recovery may not be far away. Markets anticipate recessions but also rebound before recessions come to an end. Current valuations are in a respectable range of multiple (15 to 20x forward earnings) to even reduced expectations of corporate earnings.

While, of course, we cannot foresee what the near term future holds for our clients’ investments, we will continue to closely watch world economic trends to best position our clients for long term success.

In the months ahead, our Investment Strategies & Research group will consider these trends when it conducts its regularly scheduled review of the capital market expectations which drive our asset allocation recommendations. Following that we will review all client portfolios and, where appropriate, continue the introduction of our best thinking and solutions for commodities, global real estate, private equity, public equity, fixed income, and other exposures.

And, as always, we will continue to do what we clearly can do: choose the best investment exposures we can identify, at lowest transactional and tax cost, with no conflict of interest.

Tim Kochis, Editor

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