Roll Tide Roll
3Q 2010
Oceanic tides, or the cyclical rise and fall of seawater, are one of the most powerful forces on Earth. Tides are caused by slight variations in the gravitational pull of the moon and sun, and the rotation of our planet. Many parts of the world experience mixed tides, where successive high-water and lowwater stands differ appreciably. Given the recent experience, we believe this theme serves as an appropriate market analogy.
Coming into the third quarter, it certainly felt like low tide. Investor sentiment readings were at their most depressed levels since March 2009, reflecting attitudes of anger, frustration, disillusionment, and mistrust. Economic indicators were mixed at best, with trends in housing and employment faltering and the sustainability of growth being brought into question. Global equity markets were struggling with heightened volatility and the first real “correction” in pricing since the robust recovery period began 15-months earlier. As it turns out, however, the July 2nd closing level for the S&P 500 Index (1,022.58) may have actually marked the low point for 2010.
In reviewing the statements that follow, you’ll notice the favorable impact of rising tides within the financial markets. For the quarter, domestic equities returned between 10.1% (Large Value) and 14.6% (Mid Cap Growth). Gains within the international stock categories were enhanced by a generally declining U.S. Dollar, and ranged from 16.5% (Large Cap Developed) to an impressive 18.0% (Emerging Markets). Interestingly, the diversified components within the fixed income arena provided the most heterogeneous returns. While short-term U.S. Treasury bonds continue to deliver basically nothing, Emerging Markets debt added another 8.1% to its impressive year-to-date rally. Given the initial conditions, and the concerns that developed along the way (i.e. the Hindenburg Omen in mid-August), it’s gratifying to see the various markets of the world respond in such a positive manner overall.
As we move into the final leg of the year, it’s a virtual certainty that we’ll encounter a constant drumbeat of concerns along with forecasts calling for the return to low tide conditions. Please know that we do not dismiss these points of view without careful thought. However, in our attempts to eschew conventional wisdom, we’ll highlight a number of factors that may actually lend further support to improving markets:
- History has proven that valuations are a matter of perception. With ongoing strength in profitability, sentiment readings will likely improve and investors may begin to pay more for each unit of corporate earnings.
- Corporate balance sheets have been an area of strength throughout the entire recovery. The potential deployment of corporate cash hoards (~$1.2 Trillion) enhances prospects for dividend increases, share buybacks, or internal (CapEx) and external (M&A) growth activities.
- The growing probability of “gridlock” in Washington D.C. following the November elections may bring about a comfort level that makes points 1 & 2 more likely.
- The Federal Reserve has shown a willingness to engage in whatever is needed to avoid deflation and promote growth.
Without waves, the massive waters that cover roughly 2/3 of the earth’s surface would be eerie and shorelines would be far less attractive. Likewise, the markets should be expected to rise (mostly) and fall (periodically) through time. Hopefully you find our ongoing guidance helpful in navigating your family or institution through both high tide and low tide.