News


This past month has been no stranger to bad news. From fiscal issues, to political hurdles, to economic woes, August saw it all—and we would be lying if we said we are not relieved to finally be turning our calendars to September.

The month’s start was marked by worry surrounding the issue of the US debt ceiling. We watched as the government struggled to come to agreement over how to raise the debt ceiling before facing technical default. Even after a deal was reached, the frenzy did not go unnoticed by the markets. On August 4, we saw the markets lose nearly everything they had gained over the previous months. Then, in what inevitably felt like horrible timing, on August 5, Standard & Poor’s, one of three major credit rating agencies, downgraded US Treasury’s credit rating. Accompanying these individual events was the release of underwhelming economic numbers, such as lower than expected and continually decreasing consumer spending levels, and PMI Index readings signifying almost no growth in manufacturing across the board. Through the remainder of the month, we watched the markets teeter back and forth between positive days and negative days, but the underlying realities remained true: investors acted with fear, and it has been difficult to find indicators of positive sentiment. Bond market yields have hit new lows, due in part to a sell off of many equities and a flight to safer assets. In particular, the 10 Year Treasury yield is at a 60 year low. The price of gold, representative of the same flight to safety and an aversion for risk, hit all-time highs.  

While the US tried to tackle these issues domestically, Europe was fighting its own battles—battles from which, unfortunately, we are by no means removed. With Europe’s debt crisis only getting worse, and fears about countries like Italy and Greece not acting up to snuff with austerity demands, Germany and other key leading nations in the zone will soon have to face what they’ve hoped could be avoided: much more drastic fundamental changes will need to be adopted, or the euro could fail, due to the intertwined nature of the euro zone. Reflecting on what was all too familiar on the home front these past couple of months, inaction and gridlock can be as bad for the markets as poor policy initiatives. Unfortunately, we are seeing firsthand that inaction is politically easier, especially when it comes to reaching agreement among several different nations, and when such robust options as the creation of euro zone bonds are too controversial for many to take. 

Now, entering September, European banks are certainly taking a hit. There is mounting concern about a European repeat of the banking crisis that happened in the US. Key European banks are having an increasingly difficult time securing loans, especially when the risky nature of the European crisis prevents entities like those in the United States from lending the banks what they need. It is a Catch 22 of sorts—and one whose outcome, regardless, will not be confined to the zone’s borders. Steps have been taken to avoid an all out banking and debt crisis, but it still seems as though such measures are short term fixes—band-aids for an ailment rooted deep beneath the surface.

After that kind of a month, you’re probably waiting for us to surrender to such fear. In fact, we saw moves in the Volatility Index (also known as the Fear Gauge) that resembled those of the scariest parts of 2008. However, we are concluding much the opposite: historically, there is reason to believe that such high readings on the Fear Gauge indicate a potential bottoming of the market. People remain overly fearful of things turning for the worse, and as a result, the markets reflect that. In 2008, there was nothing short of chaos surrounding a multi-faceted recession, arguably stemming from one acute event, the collapse of Lehman Brothers, whose ever expanding breadth could not have been predicted at the time. However, 2011 is a very different story.

We believe that in contrast to the intense domino effect of events that occurred in 2008, this year’s economic picture, domestically, is composed of more tangible factors, whose origin the average investor is able to track and probably understand. In other words, the past month has presented us with rather poor economic data, and talk and debate over recession rearing its ugly head, yet again. The rather shaky ground on which we stand would naturally cause some risk-aversion for investors. With the taste of 2008 still fresh on investors’ palates, the markets are likely already reflective of the global and domestic factors that give people reason to be fearful. Not only did we learn what a recession feels like in 2008, but it is also safe to say that we learned that bad times get better, and there is money to be made in this low priced equity environment, if you remain patient.

But with certain fundamentals in place, we believe that the US economy still has the potential for growth. Unemployment continues to be the elephant in the room, but hopefully the President and Congress will be able to deliver on the unemployment issue Chairman Bernanke has basically contended is no longer the Federal Reserve’s prerogative. Although we, like any other investor, continue to look to the indices with a bit of anxiety these days, we remain very confident that while unable to predict market movement for the next day or week or even month, we will see continuous growth and an eventual turnaround in upcoming quarters. This is not yet a double dip, nor is it a recession. We continue to believe that those of us who stay in the market and remain cautious will undoubtedly find our patience fruitful some months from now.