Market Commentary-December 16, 2009

While the economic data certainly has improved since early in the year, and although we remain convinced that the world economy is recovering from a sharp recession, there are a number of downside risks that remain. One of the most critical is the still-unhealthy credit markets. Many small businesses and individuals, in particular, are still unable to obtain credit. Additionally, the weakness of the labor market remains a concern (although November's employment data suggests the economy may be moving past the "jobless" phase of the recovery). On balance, we continue to believe that the economy is in the midst of a subpar period of growth and that we should continue to see some fits and starts along the way.

From an equity markets perspective, a period of slow, but positive, growth marked by occasional negative economic surprises is not necessarily a bad backdrop. Many observers, in fact, would be more concerned if we were entering a period of stronger growth, since more robust economic activity could potentially trigger a sooner-than desired move on the part of the Federal Reserve to hike interest rates, which, in turn, could act as a headwind for stocks. From our perspective, it seems unlikely that the Fed would increase interest rates any time soon. As indicated above, the economy continues to face some risks and, based on recent statements from Fed Chairman Ben Bernanke and other officials, it seems clear to us that the central bank is aware of these risks and has no desire to tighten interest rates prematurely. In any case, we would remind investors that equity markets historically have performed well during the initial stages of Fed tightening. Although a shift in Fed policy often brings about increased volatility, it is usually not until monetary policy becomes overly restrictive that stock markets suffer.

On the whole, we believe the long-term outlook for equities and other risk assets remains favorable. Technical indicators suggest that markets may have gotten a bit ahead of themselves, meaning that a period of consolidation or a correction could occur at some point. Should that happen, we would advise investors to ride out the storm. We believe the cyclical bull market remains intact and that stocks are well positioned to outperform cash and Treasuries in the current environment.

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