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May 2010
Market Commentary
By: Wabash Capital Investment Committee
On Thursday, the Dow Jones Industrial Average entered “correction” territory for the first time since March 2009 market lows. A correction is a decline from market highs of at least 10% and the current retracement is from a market peak of 11,205 hit on April 26th. The Greek debt crisis and the lack of immediate response by European Union leadership started the decline nearly a month ago. This week, festering concerns about Greece, news that initial jobless claims increased and the decline of the leading economic indicator for the first time since March 2009 only caused renewed selling to recent lows.
We realize that for many of our clients this pullback from market highs is nerve wracking. The bear market of 2008 -09 is still fresh for all of us, and one cannot help but wonder if this is the beginning of a repeat performance. Setting emotions aside for a moment, we think the odds of a new bear market starting at this point in the economic cycle are small and even see some reasons to be optimistic.
Over the past year, companies did the work of becoming very lean operators in what they saw as a dour economic climate. They refinanced debt at attractive rates and rapidly cut costs, resulting in better balance sheets and improved profitability. Most companies have reported a robust bounce in both gross and net margins over the past year and, as a result, cash on their balance sheets is hitting an all-time high. This was the first phase of emerging from the Great Recession of 2008-09.
We believe the economy is now entering the second phase of recovery. This phase relies on the creation of new private sector jobs, and last month we did see the first decent signs of job growth. Over 260,000 jobs were created with almost every economic sector creating new jobs. While we believe this phase of the recovery will be more challenging, characterized by uneven job growth, we do think that the environment will be conducive to continued hiring as we move into the latter part of this year. In fact, the aforementioned cash sitting on corporate balance sheets could eventually play a role in the jobs recovery.
Another reason we think the economy can continue its recovery is that the Federal Reserve has made clear they will accommodate economic growth with low interest rates for the foreseeable future. The inflation news this week showed continued subdued inflation, so the Federal Reserve has a lot of flexibility in keeping rates low for some time. Another important factor with regards to rates is that this month’s market decline has caused investors to buy more treasuries, and this has the indirect effect of reducing mortgage rates. This provides an additional support for economic growth here in the U.S. in the near term.
For your own portfolio, we advise you evaluate your exposure to stocks and bonds based on your own financial goals, not on expectations of the market as a whole. If you were fortunate enough to have all of your money allocated to equities over the past year, now may be a good time to evaluate your progress against financial goals you have set for yourself. Adding modest bond exposure can reduce the overall volatility of your portfolio, and help to lock in gains from the past year’s rally. If you already have bonds in your portfolio, you might want to consider using the recent market volatility as an opportunity to rebalance your account. This activity can help you mitigate your risk over time. Your Wabash Capital advisor can help step you through the process of evaluating the best allocation for your portfolio.
Members of the Wabash Capital Investment Committee:
Donald Edwards, CFA Committee Chairman
Chris Doll
Jim Exline