A Long, Hot Summer

As I write this, U.S. and foreign equity markets are in a long expected correction. Currently, this amounts to about 5% from the 52 week high of 1370 for the S&P 500 Index achieved in late April. We have been anticipating this for some time and have previously made reductions in the equity exposure in all but our most aggressive accounts. We do expect this correction to get somewhat worse over the near term and we hope to see an opportunity to redeploy at least some of those funds back into stocks as the risk- reward proposition for this asset class improves (stocks get cheaper).

There is ample evidence that the U.S. recovery is stalling. This is undoubtedly due to a combination of higher energy prices and the end of the Federal Reserve’s quantitative monetary easing (QE2). Oil prices have already began to correct and we believe they will decline further as the self-correcting mechanism (high prices lead to lower demand leads to lower prices) will act much faster following the financial crises (traders are unwilling and, because of lack of access to credit to leverage positions, unable to push the price of any asset class, including energy, to levels achieved before the financial crisis). We do believe that the market will stabilize and move higher in the fourth quarter of the year. In other words we continue a slow, painful recovery from our debt hangover and muddle through. During this time it’s important that we stay focused on the relative risk/return relationships between broad asset classes and be alert for any tactical opportunities that the market offers.

As the title implies it’s gonna be a long, hot summer. I have said many times before that good investors have both patience and courage. The markets this summer will ask us to exercise both, although not to near the extent that was required during the financial crisis.