Market Outlook
Shashi Mehrotra, CFA
Executive Vice President
& Chief Investment Officer
Legend Advisory Corporation
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Fourth Quarter 2009
December 2009 marks the end of the first decade of the new millennium and, generally speaking, it was a challenging decade. We experienced two recessions and the bursting of the technology and housing bubbles. While many are calling this the "lost decade" for the equity markets, we maintain that the decade offered many opportunities for growth and expansion. We consider 2009 a pivotal year for investors, in large part due to its reinforcement of the need for global diversification – across equity and debt sectors in both developed and emerging countries.
The US economy staged a handsome comeback in the second half of 2009, after experiencing an ugly recession which began in the fourth quarter of 2007. We believe the economy began growing again in the third quarter of 2009 and it is our opinion that we could see a Gross Domestic Product (GDP) growth rate of about 3.5% for the fourth quarter of 2009. Since the financial markets typically lead the economy by a few quarters, we feel the sustained rise in the global financial markets is indicative of an economic bottom. When we look at market breadth as a technical indicator of market performance, it appears that the domestic and foreign equity markets bottomed in November 2008. Adding six months to that financial market low would mean that the U.S. economy likely bottomed around the end of the second quarter of 2009. However, the National Bureau of Economic Research (NBER)–tasked with officially declaring the beginning and the end of economic cycles–has yet to announce that the recession is over; it could take the NBER months to make this determination.
Historically, financial markets have led the economy by about six months. Our models had helped us forecast both the recent bottom in the financial markets as well as the economy. Our models began guiding us towards equities starting in November of 2008 and then again in March of 2009. Both these points in time were bottoms for different equity indices across the globe. As we were allocating more towards equities in our portfolios at these times, it seemed the media was promoting more fear and negative sentiment. Investor monies were aggressively flowing out of equities as we were going against the consensus and moving into equities and emerging market stocks and bonds. Furthermore, we continued similar buying of equities in August of last year as well while some prominent business folks were calling an end to the rally. Below is a table that shows the performance of different equity indices across the globe.
More recently, in mid-December, we took some profits from small cap equities, higher yielding bonds and emerging markets bonds by moving money out of those asset sectors into large cap equities, higher quality bonds and developed market debt. As a result of our discipline, our portfolios have benefited from the rally that we have witnessed over the last 12 months as we have strategically moved in and out of different market sectors.
Going forward, consistent with our theme of renewed domestic economic growth, foreign economies are also experiencing a synchronized growth cycle. However, many economists are concerned that this growth may not last, and we agree. While we are calling for a 3.5+% GDP growth rate for the fourth quarter of 2009, we don't expect growth to continue at this rate; in fact, we believe economic growth could slow down considerably in 2010.
As for the financial markets, we had stated in our third quarter report that – "once investors realize that the economy is growing again, the current cyclical rally should experience an additional boost due to altered investor expectations on the U.S. economy's future prospects. In our opinion, there is a lot of money still sitting on the sidelines waiting for an appropriate time to get into the market." Since publishing that report, the equity indices have rallied strongly, as evidenced below.
As those investors holding excess cash and bonds finally capitulate and move back into equities, we believe many opportunities for growth will be present. There are many underlying fundamentals that give cause for optimism. While we believe that equities may continue to rise, we expect a more tepid pace compared to the last 9 months. The ups and downs along the way reinforce the need for preparation, diligence, proper asset allocation and, perhaps most importantly, to initiate allocation changes accordingly as market conditions dictate.
Using some of the most advanced technology in the industry, Legend Advisory Corporation's team of investment professionals continually oversees its clients' portfolios and proactively makes changes to the investment positions as deemed necessary. With the dynamic nature of our asset allocation programs, we believe investors will be well-positioned to overcome emotion and ride out the market’s inevitable gyrations.
As we emerge from what will arguably be one of the most challenging market cycles in history, we pledge to remain steadfast in the application of our investment disciplines as we move forward. We believe that for investors with the fortitude to look past the short-term uncertainty and focus on their long-term investment strategy, the current market environment may offer plenty of opportunities.
• The views represented in this commentary are solely the opinions of Shashi Mehrotra, Chartered Financial Analyst and Chief Investment Officer of Legend Advisory Corporation. The views expressed are not intended to predict or depict the performance of any particular investment. These views are as of December 31, 2009 and are subject to change at any time, without notice, based on market or other conditions.
• The source of all economic data quoted was provided by Ibbotson, Lipper, and Bloomberg. Information has been obtained from sources believed to be reliable, but is not guaranteed.
• Direct investment cannot be made in any of the indexes cited and index performance is not indicative of any specific investment. The S&P 500 Index is a market value weighted index that measures the performance of U.S. large-capitalization stocks. NASDAQ is a computerized system that facilitates trading and provides price quotations on more than 5,000 of the more actively traded over the counter stocks. The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets in Europe, Australasia and the Far East. The MSCI Emerging Markets (EM) Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The Lipper Emerging Markets Bond Index measures 10 of the largest emerging market debt funds. The Lipper High Yield Bond Index measures 30 of the largest high current yield bond funds.
• Investment in foreign securities involve risks relating to political and economic developments abroad, foreign taxation, currency exchange rate fluctuations as well as differences in accounting standards.
• Performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted.
• Legend Advisory Corporation cannot assure that preservation of capital or appreciation of capital will be realized in any of its advisory services offered. Moreover, some allocation decisions may result in losses. Diversification does not assure a profit or protect against a loss.