CoreStates 2009 Q2 Review & Outlook
The April through June period saw stocks continue their bounce from early-March lows. By quarter’s end, the advance had begun to falter, but not before adding another 12% of gains for the Dow Industrials, cutting their year-to-date decline to about -2%. International developed economies saw their markets advance some 15% (MSCI EAFE) and reach a year-to-date positive return of about 3%.
Commodities prices also reflected growing investor confidence in recovery and fears of inflation, as broad commodities indexes advanced in the area of 15% for the quarter. Crude oil led the way, gaining more than 40% in a May-June surge from $52 to $72 per barrel. Precious metals also moved higher with gold, for instance, gaining nearly 7%.
So, is the perfect economic storm finally weakening and clear sailing ahead? We at CoreStates believe the worst of the financial crisis is over, but we see three areas of likely investor misperceptions. We believe investors are early with their enthusiasm for economic recovery, are probably equally early regarding their fears of imminent, rapidly increasing inflation, but are also too sanguine regarding the longer term implications of the sea change taking place in the core of our economic system.
In our view, a slower-than-expected recovery is likely to produce at least a few months of disappointing economic measures near term, which should also defer the inevitable inflationary effects of current fiscal and monetary policies. These countervailing factors should keep most markets quite volatile, but largely within their recent trading ranges. The greater concern for prudent investors is the eventual impact of the massive increase in the role of the Federal government in our economy, and the reduced incentives to the private sector from ever-higher taxes on our most productive enterprises and individuals and ever-broader social programs for the less productive. And, this is before the impact of a national health plan, vast changes in social security, or the remaking of our public educational system.
Our governmental structure was designed with several checks and balances, a key one of which is the requirement for a 60% majority in the Senate to be assured of passing key legislation. The expectation of our founding fathers was that, to reach this level, legislation would have to be tempered by a wide cross-section of political viewpoints. Today’s Democrat super-majority, led by a President many consider the most anti-business in our history, creates a level of uncertainty for investors that is unprecedented. Although we maintain our long-held belief that it is unwise to bet against the resilience of the US economy, we also believe it is imperative in the current environment to spread those bets widely, maintain a sizeable cushion of liquidity, and be prepared to react decisively as our new economic reality takes shape.