First Quarter, 2010 Economic and Market Commentary

It is a natural tendency to want to put an unfavorable experience behind us as quickly as possible. It is no surprise then that it seems much longer than about one year ago that we were in the midst of a severe financial panic exasperated by investors worldwide convinced that the entire financial system would seize up and then collapse. However, massive global governmental action, surprisingly well coordinated, seemed to staunch the panic and establish a somewhat stable base from which a recovery could build. Though the governmental intervention appears to have been effective, it is still debated whether it was the most appropriate course. Some have argued that the system proved itself sufficiently resilient to have allowed for the failure of the major financial institutions which arguably were a major cause of the crisis. The answer to this, of course, can never be known, but its interpretation will define the regulatory framework which will impact financial institutions and markets for many years to come.

We have reached a point that many thought would have taken at least a few more years to reach than it has. The positive investor sentiment and equity market rally that started in the spring of 2009 maintained its momentum throughout much of the first quarter of 2010. Most leading economic indicators appear to indicate a bottoming out has taken place, equity market fundamentals remain firm and volatility has receded to below historical averages. Good resiliency has been shown in the global equity markets by readily absorbing an event such as the Greek debt concern. The main economic focus continues to be whether the economic recovery which has begun to unfold can be maintained or even enhanced. For every concern that indicates that continued economic and market recovery will be hampered, there seems to be some reasonable reasons for hope. For example:

  • The government has financed too much and the debt load will crush any recovery through higher taxes. The amount of government debt is worrisome, however, much of the governmental support provided appears to be largely recoverable and even reasonable economic growth should provide substantial enhancement to the treasury. Both parties are sensitive to the political realities of significant tax increases.
  • Inflation will spiral out of control and curtail any recovery. In the near term, high inventory and unemployment should dampen inflation prospects. Longer run, continued or enhanced growth should improve the fiscal picture sufficiently to mitigate this risk.
  • The market has recovered too quickly and is far ahead of itself. Clearly, the market rebound has been profound, but the level from which it came was extreme and the price earnings ratio on still moribund earnings is close to historical norms. Further, there is significant cash still in money funds with yields close to zero. Some of these funds are eventually likely to be directed toward the purchase of equity exposure.
  • No recovery is possible until the consumer spending rebounds and with unemployment where it is, this cannot happen in the short term. Historically, this would hold true for any recovery, however, there is a chicken and egg dilemma in this case. It does appear that there is somewhat of a corporate capital recovery in process and that is driving some improvement in unemployment. It is conceivable that this process could cycle on itself where the employment improvement spurs another round of capital spending which further enahnces employment.

Thus, there remain a number of reasons for the pessimism which has been a fundamental tenant of the past year to persist, but there are an equal amount of factors at work to break this tendency. Without a doubt, however, the range of potential economic outcomes over the next few years is still wide. For this reason, we will continue to espouse and emphasize an investment policy that insulates your portfolio with cash and fixed income exposure for your anticipated withdrawal requirements over the next several years. After that is accomplished, then the balance of funds can be more comfortably allocated to more volatile equity exposure. Despite this volatility as well as the flat returns senn with equities over the last decade, the S&P 500 has generally provided an annual return of 9.8%, almost 3 times the historical inflation rate of 3% and more than one-and-a-half times the return of long-term corporate bonds. We believe these fundamentals are still very much in place.

The quarter and 12-month period returns for the indexes that we benchmark our model growth component against are shown in the table below.

Benchmark Sector


3 Month Return

12 Month Return

Large-capitalization Domestic

S&P 500



Mid-capitalization Domestic

S&P 400



Small-capitalization Domestic

Russell 2000



Micro-capitalization Domestic

MSC US Microcap



Developed International Markets




Emerging International Markets




Real Estate Investment Trust




Global Real Estate Investment Trust