Third Quarter, 2011 Economic and Market Commentary

Global macroeconomic concerns continue to overshadow basically strong corporate earnings fundamentals. Although the downgrading of U.S. treasury debt seemed to initiate a confidence crisis in early August, Europe's sovereign debt issues seem to be of more immediate concern and the driver of much of the recent equity market volatility.

Greek's debt woes are well publicized and despite numerous bailout packages and austerity measures, it is widely believed that a debt restructuring of some kind is inevitable. What is unknown is if this will be an orderly or disorderly default and what the impact will be on European banks. An orderly restructuring that limits losses to holders of Greek debt and gives struggling peripheral Eurozone countries (most notably Italy and Spain) time to work through their own debt issues would likely be manageable for European banks. On the other hand, a disorderly default would likely evoke fears of debt contagion spreading to the peripheral Eurozone countries and threaten banks all across Europe that are heavily exposed to these sovereign bonds. We are hopeful that something along the lines of a more orderly restructuring is likely to play out, but due to the decentralized nature of the European Union this might take some time to unfold. Until Eurozone leaders make some concrete decisions, the volatility we have experienced recently is likely to persist.

Domestically, the main impediment is sluggish economic growth, which appears fundamental until the budget impasse is resolved and employment improves, along with improved consumer spending and sentiment. We continue to believe that a very slow recovery will continue to unfold as these areas gradually improve. We would reiterate that this is not to be without fits and starts as we have recently seen. However, corporate balance sheets are healthy and most businesses are well positioned to at least cautiously expand into any recovery.

We concede that there are no quick solutions to resolution of the debt situations in the U.S. or Europe. The fact that these risks are political and policy-driven in nature certainly exasperates these economic challenges. However, we continue to believe from a macro perspective that these issues will eventually get worked out with continued moderate economic growth. As they do, investors should be able to better re-focus their attention on corporate profitability and appreciate its potential for growth.

Although the factors impacting the global economic situation are many and will unfold gradually, market volatility will likely remain higher than average. This will apply to both the downside as well as the upside returns. It is in this regard that we continue to stress the importance of maintaining adequate cash and fixed income positions to insulate your portfolio from the inevitable volatility that comes with investing in the equity markets. The intent of the investment policy suggested is to provide assurance that you will never be forced to liquidate equities at an inopportune time while affording your portfolio the opportunity to reap the premium return that equity investing has historically provided.

The index returns for the asset classes comprising our model growth component were down substantially for the quarter. The falloff during the quarter also moved the previous twelve months return statistics for most indexes negative. Accordingly, the weighted average benchmark returns, which is the summation of each asset class' returns multiplied by its weighting in the model growth component, were also negative for both the three and twelve month periods ending September 30, 2011. These are the returns that we use for comparison purposes when analyzing the returns of our model growth component, which incorporates some active management in most categories. The index returns for the three and twelve month periods ending September 30, 2011 were as follows:

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