Market Commentary & Outlook

by Chris Brown, Chief Investment Officer, as of June 30, 2010

The second half of 2010 will be the test of the sustainability of the economic recovery. A combination of factors—sovereign debt risk, the BP oil disaster, potential tax increases and the mid-term election in the United States, the possibility of continued rate increases in China and uncertainty regarding more regulation for the U.S. financial and energy industries - have certainly all taken a toll on the market.” As a result, investor sentiment has turned negative along with more talk of a “double dip recession” for the economy. Against this backdrop, we have lowered our gross domestic product (GDP) projections for the next two quarters and for all of 2011. We also feel consensus projections still remain high for GDP growth. Unless the government initiates additional federal stimulus programs, which is extremely doubtful, the end of the current stimulus could also put a drag on near-term GDP growth. Job and wage growth have clearly been the laggards in this muted recovery. Therefore, we believe interest rates will most likely remain low for at least another year and a sustained period of volatility will continue for the markets until a clearer picture of an economic recovery unfolds.

In the meantime, we believe an increase in capital spending will be one of the bright spots in the recovery.  We also realize it cannot replace the weakness of the consumer and its impact on GDP growth.  In general, corporate balance sheets are in great shape, profit margins are high and many companies are exhibiting strong EPS growth. This contradicts the macro issues listed above, and opens up many opportunities for potential investment. This has also contributed to an uptick in merger and acquisition activity, especially in small- and mid-capitalized companies. Larger companies seem to be looking to buy and invest in growth. Emerging markets continue to be a bright spot as well, as many emerging economies continue to build and reinvest in their own infrastructure. We think this should bode well for U.S. companies that sell into these markets.

Longer-term, we feel the U.S. and the global economy will ultimately recover and demonstrate sustainable growth. As long-term investors, we believe that we have positioned the funds for this resumption in growth as well as for some of the shorter term opportunities that may arise.
 

Information in this report regarding market or economic trends or the factors influencing historical or future performance reflects the opinions of management as of the date of this report. These statements should not be relied upon for any other purpose. Past performance is no guarantee of future results, and there is no guarantee that the market forecasts discussed will be realized.

Past performance does not guarantee future results.

 

PAX000898 (11/10)