Second Quarter, 2009 Economic and Market Commentary

The financial panic which ensued during the final quarter of 2008 and continued into the first quarter of this year appeared to subside as we entered the second quarter. This was welcome relief after some of the most tumultuous months in the history of financial markets. It became clearer during the period that a total catastrophic failure of the global financial system was less and less likely.

The major concern of most economists as well as governmental and central bank bodies is now one of a long term, global deflationary environment. Such a situation is evidenced by a reduction in consumption, which leads to business retrenchments, which then lead to further reductions in consumption. This is a vicious cycle which has been shown in some local economies to take many years to work through. It has never really been experienced in the U.S. or on a global scale and it is particularly worrisome as there are no fiscal or monetary responses proven to effectively combat the condition.

The global commitment to shore up the financial system, however, has shown significant success in calming the panic experienced in the markets. Although financial markets remain very tight, there has been significant improvement in the availability of liquidity. This has afforded governments the opportunity to focus on restoring economic growth and they have addressed this through very significant stimulus plans adopted in almost every developed and developing country in the world.

Nevertheless, there are still a number of tenuous conditions within the U.S. and global economies. Among the more significant is whether the fiscal stimulus packages will work. Overall, our opinion is that there impact will be limited, however, these programs have done much to ease the panic at the core of the crisis and thereby have helped restore some confidence. Further, there is significant concern that these stimulus programs will be extremely inflationary. We believe that longer term, there is some risk of inflation, but that excess capacity and low employment levels will temper that for several quarters at least.

Although the actual impact of stimulus programs may be limited, they still positively affect growth. Further, we are of the opinion that global economies have a strong probability of cycling through this recession on their own and some developing markets may have already begun to do so. Clearly, in the U.S., the level of unemployment and consumer savings will make this a slow and arduous process, but even here, we may already be close to, if not already in the process of, cycling out of the current levels of activity and spending. Although sentiment is likely to remain weak for several more months and recovery may be tepid, this would be typical of recovery from consumer-led recessions. This recession is no different other than it has been exasperated by a global financial panic during its process.

Any signs of recovery are likely to be met with skepticism after what we have been through, thus there will be some fits and starts to this process. But, as prospects for some economic growth are restored, firms will anticipate and plan accordingly by spending and hiring. This should create a more favorable cycle which, coming from the base established, may have the capacity for significant duration.

The following result should be an enhancement in company earnings that may be quickly reflected in market pricing as historically extremely high levels of cash are directed toward equity markets. The timing and level of these movements are impossible to predict. Further, there will be adjustments along the way as the sustainability of any recovery will be constantly challenged. Further, with some meaningful market recovery, it is possible that some participants may re-evaluate previous tolerances to risk. This may somewhat temper the equity markets recovery, but by no means preclude it. Again, our suggested policy continues to be to maintain volatile stock exposure through these difficult periods by insulating the balance of the portfolio with less volatile holdings in the form of cash and fixed income exposure that can see you through 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