August 8, 2011
We would like to weigh in on the turmoil in the market. Our position is that investors should not panic or take action based on fear. We cannot predict the future, but we can prepare for it by continuing our diversified approach. Currently, the markets are being driven by several macro themes including the EuroZone crisis, the US credit downgrade, and a possible global double-dip recession, rather than by fundamentals of the market and individual companies. Here are some of our thoughts:
The S&P is one of the major credit rating agencies. The other two agencies (Moodys and Fitch), reaffirmed the US’s AAA ratings. However, this action may lead to further downgrades by S&P on other countries, including those in Europe, which are already on shaky ground.
US government debt remains the most liquid safe-haven for investors. We do not believe the US will default on its debt in the foreseeable future. In fact, we believed that default was a low risk even during the debt ceiling debate.
We believe that a large sell-off of sovereign debt holders is unlikely. It’s not in their best interest since it could spark price declines in their remaining holdings. The bond markets should be more stable than the equity markets. As of Monday morning, there was little reaction from the bond markets.
We hope the downgrade leads to a wake-up call to Washington and a longer-term plan for our fiscal policy. It appears that the downgrade was due more to D.C. bickering than to actual U.S. insolvency.
There have been many positives from individual companies during the recent quarterly earnings season. These have been overlooked because of the macro themes. However, it appears that the economy is going up against some headwinds that are leading to slower growth. We do not currently believe that we are headed into another long-term recession.
Since 2009, we have reduced exposure to the stock market in most portfolios. We have maintained and increased exposure to other asset classes since then, including absolute return strategies, real estate, commodities and managed futures. We continue to believe a diversified approach will help lower volatility and create opportunities for increased returns going forward.
We are monitoring the market closely. If we believe any action needs to be taken, we will notify you. Please call us at 858-676-1000 should you have any questions.
Chris L. Meacham, CPA, PFS
President & CEO