Quarterly Thoughts – Q3 2009
During this Global Financial Crisis or “Great Recession,” the foundations of Wall Street and the global financial system were shaken by the collapse of Lehman Brothers, the vanishing of Merrill Lynch as an independent entity, and the take-over of AIG by the government, amongst other events. Roughly six months ago, on March 9th when the Dow Jones Industrial closed at 6,547, the press and average investor felt as if the world might be coming to an end. However, disciplined investors knew better.
Since March 9th, the economy has moved back from the precipice and there is a growing consensus among economic forecasters that while there may be both negative and positive surprises, we’ll return to economic growth in the second half of this year and early 2010. In anticipation of an improving economy, markets experienced a strong recovery. Since March 9th, stock markets are currently up more than 50%.
During the past year investors learned or were reminded again that both equity and bonds markets can be very volatile over the short term. Having experienced the most significant market and economic shock of their lives, many investors found that they’re less comfortable with volatility than they had believed. As a result they have come to appreciate that it is crucial that the overall asset allocation, diversification and structure of their portfolio align with their true tolerance for volatility. Investors also now realize how important it is to focus on things that they can control; how much they spend, how much they save and thinking through their investment time horizon.
While no one can predict the short-term direction of the market or the economy, we expect that the market will continue to be volatile. However, as we look out two to three years and beyond we are optimistic. There are things happening under the surface that will drive economic growth, and with the economic growth will come growth in stock prices and improved credit markets. In the meantime, clients are staying focused on the horizon while passing through rough waters. Volatility may be very uncomfortable, but for most, it is part of the necessary price we investors for higher long-term returns and arriving at your ultimate destination.