What Next for Your Investments?

Last week was the preliminary second-quarter GDP report that showed the US economy contracted at a better-than-expected 1% rate, following a much sharper 5.4% decline in the fourth quarter of 2008 and a 6.4% decline in the first quarter of 2009. This reinforced the general perception that the economy may be starting to recover.

The current recession started in the housing market, and it is encouraging to note that housing appears to be improving or making a bottom.  The widely followed Case-Shiller US Home Price Index reported its first monthly increase since July 2006. These improvements in housing are coming on the heels of a rally in credit markets and ongoing reflationary efforts on the part of the Federal Reserve and other policymakers, and, we believe, should eventually contribute to improving economic conditions.

Looking ahead, we believe that the second quarter will mark the last of negative GDP growth and that economic growth should increase by 1% to 2% in the third quarter. It appears likely to us that the recession will end by the end of this year.  We continue to believe that the rebound will be held back by tighter credit conditions, but even with these drags, GDP to may grow at around the 2% to 3% level over the next 12 months.

From an equity view, we believe a number of risks remain, but several positive factors are also playing an influence. Monetary conditions remain very market-friendly and valuations are still reasonable. Downside risks include: constrained consumer, expanding budget deficit, rising tax levels and the possibility of increased regulation. On balance, we believe that the short term rally may have gotten ahead of itself, but the intermediate term remains constructive. Over the coming months you’ll see some changes as we shift more towards Growth Asset classes, which tend to lead the US out of recession; balanced with tight risk controls, in case of a pull back. Successful investing includes a good buy and a good sell decision.  We appreciate your trust.