A year has now passed since what seemed to be the darkest days for our economy and only a little over six months since the stock market spiraled its way down to the bottom. The strength of the bounce back from there has been nothing short of amazing, illustrating what can happen from the extreme situation of March when fear had driven a sell off in stocks of almost unprecedented proportions. The panic buying that we alluded to in a prior commentary has indeed materialized. Where is the much anticipated September correction? It has failed to materialize as the equity markets continued to climb higher, bringing the year to date return on the S&P 500 to 19.26%.

As we had mentioned last quarter, this rally has continued to be driven by stocks of lower quality companies, obviously representing those that had taken the hardest beating as well as reflecting a renewed interest into risk taking by investors. Our diversified set of methodologies has allowed us to fare well as we maintained maximum flexibility in an environment that was somewhat disconnected from the underlying fundamentals.

On the economic front, it is pretty much a “fait accompli” that the recovery is already underway as you read this. However, by the time an official statement from the powers that be is released, we will probably be working on our next recession. Not every industry or area of the country can claim this, but as a whole, we are looking at positive gross domestic product growth for the third and fourth quarter. It seems to be fashionable at this juncture to discuss a double-dip recession as a possible concern. However, history has shown this to be a rare event, only occurring twice historically and both times due to policy errors.

With regard to what comes next, it is easy to play advocate for both the pessimistic and the optimistic view with fairly valid arguments on both sides. The view we collectively aspire to will ultimately play a huge role in determining the outcome. We know this from experience. We have seen markets move overnight on a sentiment shift. Also, much of what rests ahead will be based on how fiscal and monetary policy plays out as we come out of this recession. Our policy makers do not have much room for error.

On the pessimistic side we would refer to the high debt levels for both private and public sectors, a banking sector that is although healing far from normal. Heavy pressures on the consumer who has experienced a drastic drop in net worth with elevated unemployment levels that hamper consumption, one of the main engines of growth. Some anti-growth government initiatives such as higher taxes, protectionism and interference with businesses are a concern. Budget deficits at the federal and state levels are bleak. The U.S. dollar is weak. Concerns for deflation and inflation are both on the table.

On the optimistic side we have the global stimulus which has been of unprecedented proportions. Stocks do foretell a bullish economic story. Record low inventories and industrial production and capacity could quickly spring back from a very compressed state. There is much pent up demand both on the consumer and business side. Housing is likely to have bottomed. US Exports are up sharply. Credit markets are at least back to pre-Lehman levels and there is on-going improvements with credit standards with a favorable steepening yield curve. Corporate profits are up almost 30% in the first half of the year. Unemployment declines are moderating and household net worth is higher. Oil prices are back to lower levels, a boost to household budgets and inflation is still tame.

We are of course leaning toward the optimistic view. The media has many times before proclaimed “the end of American affluence” or some equivalent headline, constantly underestimating our ability to innovate and prosper. If we look back over the last twenty years, think how many jobs exist today that didn't exist then. What does the future hold? Someone twenty years ago could not have truly envisioned the world that exists today. Things do not evolve in a linear fashion. The knowledge we have today cannot really be used to extrapolate the future. There are too many game changers out there or around the corner that could radically impact our world.

We are very thankful for your trust and confidence and the opportunity to serve you.