Third Quarter Review
This has been a year of contrasts, starting with a first quarter that saw strong increases with the second quarter flat. The third quarter was ugly with a capital U, with extreme volatility and the sharpest decline since the first quarter of 2009, when we were in the middle of the global financial crisis. The main drivers of this decline were sovereign debt worries in Europe and a dramatic downgrading of growth forecasts for the global economy, with a slowdown in China and mounting talk of a double-dip recession fueling anxiety.
Below are results for key markets
I would like to focus on four themes that will dictate what happens next in the economy by looking at quotes from prominent economists
Theme 1 - Challenges for Western Economies
The first theme relates to some of the troubling issues facing the United States and Europe.
Warren Buffet on the challenges for Europe: "It was clear well over a year ago that we were headed toward a cliff. Europe tried a grand experiment where the imperfections in it are becoming manifest and the numbers are big. The solvency of the banks is intertwined with the solvency of sovereigns and vice versa. They melded the currency for 17 countries; however they didn't meld the culture."
Meredith Whitney on US housing: "What really powered the US economy for the past 20 years was housing. The biggest structural unemployment problems are in those states like California or Florida that were wed to housing. Housing's not coming back, and it's hard to imagine housing becoming a driver o the US economy going forward"
Theme 2 - The end of America.. or a new beginning?
Despite the issues facing the country, there was broad consensus about America's ability to make the changes needed to compete
Jim Leech, (head of Ontario Teachers Pension Plan) on why the US will adapt. "Maybe America is in its denouement. And then you sit back and look on a relative basis and say, 'No you can't count out the largest, the most innovative economy in the world...' The US has the economic, the political, and the legal constitution to have the flexibility to solve issues. Those factors aren't apparent in the Far East; they aren't apparent in China."
Theme 3 - The price of avoiding risk
One topic that gets a lot of attention is the risk avoidance as the paramount objective for many investors
Larry Fink, CEO of BlackRock on the biggest risk for investors: "I would avoid 2% treasuries - it's very hard to make a living earning 2%. So if I had to look where to invest, I would own a core amount of Treasuries just for liquidity purposes, and I would be looking towards dividend stocks. I would be looking towards credit opportunities. Especially with the European banks selling assets, there are going to be some great credit opportunities for investors in Europe. The greatest worry I have is under-investing and destroying your foundation, and I think that will be the greatest risk in the next few years."
Theme 4 - Opportunities in global markets
A majority of experts agree that current valuations make US and European stocks exceptionally attractive.
Pierre Lagrange, a London hedge fund manager on the upside for European companies: "Europe is making adjustments at the political level structurally which is very good. Since 2008, companies have really had the license not to spend money. And you have had an extraordinary drive to productivity increases and cost rationalization, so we have a lot of companies which have an extraordinary operating leverage."
The key points to take from the four themes are that clearly we should be cautious given the policy challenges ahead, but for those investors who need growth to achieve their long-term goals. We also need to take a longer view on outstanding companies available today at inexpensive prices.
The fourth quarter started out strong. October saw the best month for stocks since 1974. A lot of that has to do with the strong corporate earnings and progress in Europe with their debt crisis.