Investment markets have been volatile as participants digest conflicting data.
Positives have included improving employment, corporate profits, M&A activity, and ongoing stimulus…while negatives have included debt concerns, increased inflation, and global supply-chain shocks due to the historic Japanese earthquake (e.g. automobile parts, electronics, and various other components have been temporarily restricted due to supplier shutdowns in Japan).
Differing Market Outlooks
The consensus view is that we are pausing to consolidate gains within an ongoing bull market.
As supply shocks are absorbed, and debt concerns are addressed, growth is expected to reaccelerate in the back half of 2011. Others, however, fear that markets will decline with the end of Fed stimulus mid-year.
At this time, we believe the consensus has the more accurate view.
Passing The Baton
Typically, governments reduce their stimulus and attempt to pass the baton of growth to the private sector, resulting in market volatility before a renewed advance. We evaluated this possibility last summer, after an 80% run-up from bear market lows.
However, the Fed re-engaged in a second round of stimulus during late 2010 after weak private sector results, and a 10% market decline.
Thereafter, Fed-stimulated markets rose through Q1/2011. Now we are once again attempting a mid-cycle handoff, with Fed stimulus ending, and positive indicators coming out of the private sector.
Initial evidence points to a true transfer this time around, especially on the jobs front (see chart).
Chart I – US Payroll Trends (000’s)
*Source: US Bureau of Labor Statistics
QE3?
It is possible that the handoff from government to private growth will fade once again, especially considering the level of debt overhang that lingers on from the Great Recession? If this occurs, we could see a third round of Fed stimulus.
However, the appetite for further government stimulus has been drastically reduced amongst the populace, and the ability to stimulate is starting to wane, as it requires more and more morphine to achieve the desired result in a stimulus-addicted economy.
US Corporations Are Doing Well
Short-term issues aside, the US corporate sector has been performing incredibly well.
New industries are beginning to mature and generate significant growth (e.g. social media such as Facebook and LinkedIn), showing once again how the US innovates new and higher margin businesses domestically while outsourcing lower margin businesses abroad.
Additionally, emerging market economies continue to post incredibly high GDP figures, in many cases growing 3-4 times faster than the US.
After some early year inflationary pressures caused governments to tighten their financial policies and emerging markets to underperform, they are once again starting to rise as expected as commodity prices have pulled back to more reasonable levels.
Staying Ahead With An Active Strategy
It is imperative to have an active investment strategy in uncertain times like these.
LGA continues to actively leverage uncorrelated investments in multiple markets and different assets classes.
We also supplement our client’s asset allocations with alternative trading strategies that can provide positive returns while offering insurance against potential US market declines.
Such diversification has occasionally resulted in short-term underperformance relative to rapidly advancing benchmarks, but tends to deliver superior long-term results.
Additionally, we believe that it pays to be slightly more conservative during uncertain periods, with our number one rule being to avoid catastrophic declines in portfolio values when large corrections and bear markets hit.