Founder & Chairman
The Greek and French elections provided some interesting story lines, but when all was said and done, things could have gone a lot worse. It appears the Greek political situation got a little better as the pro-bailout/stay in the Euro-zone group won, paving the way for further negotiations and discussions. Had they lost, Greece may have left the Euro-zone and ultimately defaulted on all the borrowed Euros they owe. Suffice it to say, we’re glad that didn’t happen. Despite the somewhat positive election results, Monday’s market was mixed as the attention turned to Spain and Portugal as it’s clear they are the bigger problem. Needless to say, the saga continues. We expect the headlines to continue to include economic problems in Europe for many months.
Last weeks Fed meetings ended with a resounding thud, which is pretty much what we expected. The Federal Reserve Board extended operation twist, but stopped there with no QE3 anywhere in sight. The way we see it, the market will have to dive at least another 10% before the Fed were to jump in. It’s obviously an election year, and the Federal Reserve Chairman is supposed to be impartial when it comes to politics. A significant market downturn, in conjunction with all the problems in Europe, not to mention the latest bombshell revelation that the Chinese may have overstated their economic activity would give the Fed all the political cover it would need to take action. It appears the U.S. economy could already be in a recession, although the numbers may not reflect it for a few months. Unemployment has risen as of late, consumer spending is starting to show signs of a slowdown and the housing market seems to be getting a little worse. Our guess is that the Fed steps in with some form of additional stimulus in August, unless things deteriorate more rapidly and severely.
The question is: what does this mean for investors? If we assume that another round of easing is in the works, then certain asset classes would likely benefit more than others. In our opinion Fed action would probably be better for stocks and other risk-based assets like commodities than bonds. Interest rates are hard to call here, as they could literally go either way, depending on how much worse the economy gets. The Fed won’t raise rates any time soon, however, if the U.S. takes on more debt that alone could push rates higher. If the U.S. were to experience a credit downgrade, again rates could go up. If the economy doesn’t get a whole lot worse, Europe stays in the headlines and the next Fed package is modest, then rates could stay low. The best approach in our opinion is to hedge and not place too much emphasis on a particular outcome, or place too much money in one asset class.
We have updated our models to reflect the current market conditions, and have accounted for some what-if scenarios that may come to pass. We remain more defensive, but are looking to potentially take advantage of certain opportunities that might arise as a result of Fed action. The environment will likely remain challenging and we continue to consume as much research and information as we can. We have taken a much more proactive approach to making changes as new information becomes available, and having more experience in this “new normal” should help as well. As always, if you’ve authorized us to make the changes via the discretionary program then we have already updated your portfolio. If you have not given us authority to make changes via the discretionary form you will need to send us an email or call the office to have your portfolio updated. Many thanks for your continued trust and confidence.
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