Global stock markets were down 6% to 13% in the first half of this year (depending upon which index you look at). Starmont Clients were flat to down 1% – 3% (as always, this is net of fees and costs). This is because Starmont Client portfolios underweight the equities market, and our Clients’ fixed income holdings are up for the year but not as much as the equities are down. (July was a better month, and most major domestic stock indexes are around flat as of July 31.)

Through June 30, the year was a tale of two stock markets. The first part of the year through April 25 was a continuation of the strong 2009 bull market. Indexes were up and it appeared that the recovery was taking hold. But things turned, and from April 26 through June 30, the market (as measured by the S&P 500 Index) dropped over 17%.  May was horrible (the worst May for the Dow Jones Industrial Average since May 1940). June was bad as well but not as bad as May.

The questions now are:

     – Whether the economic recovery will continue in the United States and globally, and if so, at what pace, or will the US and/or the global economy slip into a double-dip recession?

     – Where will growth come from?

     – What asset classes present the best opportunity to add value going forward? (This question will be addressed in Part 2 of the First Half Market Update coming tomorrow.)

Economic Growth

 Growth in any economy comes from one or more of the following sources: 

1. Individual consumption. Indeed, consumer spending in the United States made up a large portion of GDP in prior years. But with unemployment still high and housing prices and consumer sentiment still low, consumers have cut back on their spending and are saving more and de-leveraging their individual balance sheets (i.e., paying off debt).
2. Corporate spending. As of March 31, non-financial companies in the U.S. were sitting on $1.84 trillion in cash and other liquid assets as a cushion against continued economic malaise. When these companies gain confidence in the U.S. and global economies and start spending that money, it can add fuel to U.S. and global growth.
3. Government spending. The Obama Administration got a stimulus bill through Congress early in the Administration. But it appears that any further stimulus bills will run into opposition by both Republicans and Blue Dog (conservative) Democrats who do not want to add any more to the U.S. deficit. It appears that there will be no stimulus legislation at least until after the November elections.
4. Exports. U.S. companies are increasing their exports, but the U.S. continues to import far more than it exports (oil to be refined into gasoline being a leading import). The U.S. is talking to a number of countries to try to improve existing trade treaties. China allowed its currency to float a smidge after pressure from the U.S., so that U.S. imports into China would be a bit more competitive. That is not going to help in the short run unless China is willing to float its currency to a larger extent, which it does not appear to be willing to do. And with the Eurozone and Japan having economic difficulties and the Eurozone apparently committed to their own de-leveraging programs at a country level, it is hard to see to whom U.S. companies are going to be selling their goods and services in sufficient quantities to provide a growth engine for the U.S. economy.

So are we doomed to a double-dip recession or a long, slow recovery without much growth? Maybe or maybe not. It is possible that we will get some help from each of these growth sources, as consumers start to spend a little more, corporations begin to use their cash hoard, the government is able to help some and exports are increased. But it could take us the rest of this year, until a new Congress is elected and any lame duck session of the existing Congress is concluded, before a clearer picture might emerge.

While we wait, we will continue to have our Clients own a diversified portfolio of stocks and bonds, along with some managers who can short as well as go long and who are able to buy alternative investments like gold and currencies as their research and experience dictate.

This entry was posted on Monday, August 9th, 2010 at 8:18 pm and is filed under Blog, Messages to Starmont Clients, The Market. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.