Fourth Quarter, 2009 Economic and Market Commentary

If the new millennium is to be a book with the initial chapter being its first decade, we may conclude it is going to be a horror story about terrorism, bursting economic bubbles and potential financial collapse. However, as we turned the last page on 2009, we saw weak, but improving conditions and wonder whether the book will turn out to be as scary as we thought. Indeed, the major question in most people's minds is whether the substantial recovery we have seen since last March is sustainable into 2010 and beyond. We are of the opinion that there are reasons to be cautiously optimistic in this regard.

First, most fundamental leading indicators of the economy would indicate continued improvement. The cost of money is low, loans to business are improving and inventories are very lean. Cautious consumer spending will temper this improvement due to high unemployment and increased savings rates, but the former should mitigate, albeit slowly, as the economy improves.

Second, monetary policy (and likely fiscal policy) is expected to remain highly stimulative even if conditions do continue to improve. The fed is clearly focused on its mandate of full employment over its other mandate of price stability at the current time.

Third, the breadth of the current recovery is global in nature. The leading indicators of 39 of the largest economies in the world are improving. Although this may also be a sign of how bad things were at the beginning of 2009 when none of the 39 countries were showing growth, it is the first time in 20 years that all have been improving. Such continued recovery overseas, should help to enhance this country's export capacity.

Lastly, overall sentiment, although improving, is still relatively negative. If the trend to better sentiment continues many facets of improved economic performance are more likely.

Thus, the strength of recovery may actually have a potential to positively surprise the economic consensus over the next several quarters. But, of course, there are a number of significant risks to many of the potential positives outlined above; large government debt, the state of the housing market and poor company sales are just a few. Therefore, investment policy should concede the fact that there is likely to be near and intermediate term volatility. We will continue to suggest then that only a portion of your portfolio, which can be identified as not necessary for several years, be directed to equity exposure.

Turning the focus to the equity markets, we note that although the decade ended on a positive note with a strong recovery in the latter part of 2009, the 2000's will go down as one of the worst decades on record, second only to the 1930's. The Dow (-9.3%), S&P 500 (-24.1%) and Nasdaq (-44.2%), the most commonly referenced indices, all declined over this ten-year period and the hangover from the recent financial crisis continues to permeate a malaise of sentiment among many investors. Nevertheless, it is important not to lose sight of the long-term returns that stocks have provided investors despite what might be considered the anomaly of even the last decade.

A new year always brings predictions of what may be in store for the next year or longer. For example, currently, there is quite a bit of discussion regarding the equity markets at this stage entering what would be called a "trading range" market where the market bounces around a static range for a number of years. We do not suggest you give much credence to such predictions as statistically you will have a strong probability of of losing potential return in the process. We do not necessarily disagree with the predictions all of the time. For example, in a trading range market, our conclusion would be that properly allocated equity exposure is still appropriate. Over 70% of our growth component is actively managed. Therefore, it is the fund manager's responsibility to identify opportunity in any type of market including a trading range market. Indeed, a case could be made that the active manager's potential to add value is enhanced in such a market, but we will not extend that discussion in this report.

Instead, we continue to recommend an investment policy that uses cash and fixed income to represent your near and intermediate term requirements and equity exposure only with those assets in your portfolio that you have proved to yourself you do not need to access for several years.

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

MSCI US Microcap



Developed International Markets




Emerging International Markets




Real Estate Investment Trust




Global Real Estate Investment Trust

FTSE (ex-US) Real Estate