Beyond the
Trading Desk
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Summer is here, but you would hardly recognize it with the temperatures and rain we are experiencing. I hope the weather improves as the season progresses. Either way, Sandra and I will be out hiking and enjoying it as best we can with our two rescue dogs...Simon and Edy. They are happy to be out rain, shine, warm or cold! Have fun!
Generally the demand for financial services slows during the summer months as most people focus on their children, recreation and vacations. So for me, summer can be a good time for retrospection. In that spirit, I have been thinking about the financial crisis. The last eight months have been extremely difficult as our economy has proven to be more fragile than we ever expected. While the events over this period have been extreme, I would like to remind everyone that we have seen these cycles before and have persevered.
To quote a recent speech by President Obama "...things are never as good as they seem and never as bad as they seem." These words ring true in my mind because, in the aggregate, betting against the United States and its resilience has proven historically to be a bad bet.
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Last Quarter Round-Up Last quarter I said I was "cautiously bullish" for the second quarter. That turned out to be an understatement as the S&P 500 gained 15.2%...its best quarter in a decade. As we expected, the economy continued to weaken, but at slower pace. The slowing of the economic decline was seen as a sign of a coming recovery and that sparked renewed interest in stocks and risk-taking. The Fed did purchase Treasury bonds as promised, but that effort was short-lived as the Government learned it could not control long-term interest rates. Inflation continues to be a non-issue as year-over-year CPI is -1.01%. The equity strategy last quarter favored U.S. over International with additions to small-cap positions and a re-opening of positions in commodities and emerging market stocks. The fixed-income strategy was to hold long and hi-yield bonds while maintaining a hedge position in inflation-protected bonds. Quarterly asset class results: U.S. +15.22%; Int'l +21.87%; Large Cap +15.05%; Small Cap +25.63%; Emerging Mkt +29.91%; Commodities +19.34%; Long bonds -10.54%; Hi-yield bonds +17.57%; Inflation-protected bonds -1.08%
Global Economic Outlook While the recent rally has eased many concerns, I worry that it may have been overly optimistic. Much attention has been paid in the last three months to the fact that the economy got worse at a slower pace than it had seen during the overly pessimistic first quarter. I fear we can go just so far on the idea of being "less bad". I don't expect to re-test the March lows, but I believe a pull-back from here is quite likely. Headwinds abound in the current economy and only time can allow true healing. As the summer progresses, I expect the markets to be disappointed that the recovery is not coming soon. The economy will continue to get "less bad" and even stabilize, but that is a far cry from real recovery. My equity strategy for the coming quarter will reduce overall stock exposure while adding to Small cap positions. The fixed-income strategy will be to move away from Long bonds, increase Cash and Short bonds while holding positions in Hi-yield and inflation-protected bonds.
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Notes: Asset class & style returns are based on the price-only performance of ETF's & ETF blends with similar respective focus. Asset class and Style results do not reflect the performance of Barron Financial Group, LLP's advisory accounts. Advisory accounts may not contain these investment strategies and may contain investment strategies not described here. Advisory services include asset management fees that are not reflected in these results. Please contact Barron Financial Group, LLP for more information about specific asset class, style or portfolio returns.
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