Third Quarter, 2009 Economic and Market Commentary

Had one been told about a year ago when the Dow traded at 11,000 that the recession might persist and the market could weaken another ten percent or so over the next year, this likely would not have surprised or overly concerned too many. It is said that ignorance is bliss and although we have arrived at this market level (at least for now), probably no one has had the good fortune of having been oblivious to what has transpired during the last year. It was mentioned in previous reports that much would be said and written on the events of the last year and much has and undoubtedly this will continue. Although there is no shortage of opinion on causes, effects and potential solutions, our opinion is that the majority of what transpired was more emotional than fundamental in that what was seen, particularly earlier this year, was outright panic.

This is not said to downplay in any way the impact of sentiment and emotion because the factors contributing to this panic and the severity of its results were hardly imaginary. It does, however, underscore the difficulty in attempting to rationalize or predict the timing and magnitude of such events which have a profound impact on the economy and financial markets. The situation a year ago was not commonly considered either overly euphoric or pessimistic, yet a global economic panic unfurled rapidly and inexplicably.

To extend this situation to today, it would be appear that, even in light of the recent stabilization and recovery, there seems to be a persistent negativity and malaise of sentiment. There are a number of areas of concern which we will discuss below in the order of potential importance. We will touch on the negative and then positive considerations within each of these areas.

Deflation. We are still not out of the woods on this issue yet. A cycle where the participants in this economy continue to defer activity because it will be cheaper tomorrow would likely mean continued low growth, high unemployment and reductions in standard of living for a protracted period of time. However, even ignoring government spending, some would see some pent up demand being released by both consumer and companies during the last few months as a potential bright spot.

Inflation. As the government continues to spend less money than it takes in, inflationary pressures are hard to ignore. But we would see this as a threat a number of years down the road since there is a high level of unused capacity in this economy and limited or slowly growing demand.

Stagflation. So let's instead have low economic growth with price increases anyway due to dollar devaluation and runaway government spending. It may seem like this for awhile as we would anticipate that employment and consumer spending will recover slowly from one of the most pronounced recessions on record. However, we believe a weaker dollar will help balance of trade and even a modest amount of growth will go a long way to mitigating the federal budget deficit.

Higher income taxes. There is no question that the budgetary and political stance of the country would indicate upward pressure here. However, we further believe the current dominant party in this country want to remain that way and has a fundamental understanding that economic growth is critical in this process as it is broadly accepted that tax increases must be limited to achieve that growth.

Market Valuation. There is concern the market has recovered 50% in a short period of time and must be overheated and well ahead of itself. It is also significantly off its highs seen over two years ago and trades at a level where it did over ten years ago.

Thus, although the general prognosis for the short to intermediate term may currently be somewhat on the negative side, there are still many factors that may temper this or perhaps may even turn it positive. As this will be impossible to accurately anticipate, we will continue to espouse an investment policy where equity exposure is maintained only with those assets in your portfolio that you have proved to yourself you do not need for several years and cash and fixed income to represent the interim.

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