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Last Quarter Round-Up
Last quarter I mentioned two common projections that often come after a strong, positive market such as we had in the first quarter. They were: (1) a correction is at hand, or (2) hurry and get in before you miss it. Over the second quarter, concerns over Europe's sovereign debt problems and weakening economic data in the U.S. had the markets in the "correction" camp for most of the quarter. Many expected (myself included) another round of quantitative easing (QE) from our own Federal Reserve (Fed) to help stimulate the economy. But the Fed didn't pull the trigger on another round of significant QE. Instead they continued a bond-buying program known as Operation Twist designed to help keep long-term interest rates low...a much less dramatic form of stimulus. The market was disappointed in the Fed's efforts and was down -3.29% for the quarter.
Then, on the last day of trading in June, Europe announced its most sweeping financial program since its Long-Term Refinancing Operation (LTRO) in February. The markets responded positively as the sentiment shifted from a sense that Europe was at a breaking point, to one of possible resolution. In general, Europe's crisis is shifting from a financial one to a political one. Politicians are at odds with each other, their voters, and voters in other countries. They seem unwilling to work together. These new "solutions" are far from perfect. But the new ideas are an indication that when push comes to shove, European leaders are willing to work together.
Current Quarter Outlook
Here in the U.S., you either believe we are headed for another recession or we are not. While I believe we are in another summer slowdown, I don't think it will lead to recession. In fact, I stick by what I said last quarter that the market can hold, or even expand from these levels. If the U.S. does not end up in recession, and, if Europe can avoid another debt-related panic, then the markets seem reasonably valued. China, which also seems to be slowing, is a factor, but does not seem on the verge of a substantial move in either direction.
Despite the negative news, talk of recession and the nearly complete lack of consumer confidence, the U.S. economy continues to grow. It's not at all robust with Q1 Gross Domestic Product (GDP) coming in at just 1.9%. But the takeaway for me is that it is positive growth in a very difficult environment. I believe this will continue. It won't be a straight line and there will be times when it seems we are headed in the wrong direction. We should be careful not to overreact. For Europe, they have developed a pattern of political extortion and brinkmanship that pushes their leaders and the markets to the edge. Then, just as it appears the whole Eurozone will collapse, a monumental effort is put forward with new unity and ideas for solution. It can't work this way forever, but we'll likely see this pattern continue awhile longer. My equity strategy for the quarter is to maintain equity exposure while overweighting U.S. allocations. For fixed income, I intend to add to mortgage-related bonds and maintain cash.
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