Markets are once again testing their lows and every investor’s resolve and patience. Economic conditions in some areas have improved, but in most areas continue to decline. The deterioration in the economy will be increasingly evident over the next few quarters in the unemployment numbers as consumers spend less and corporations lay off workers to offset their lower sales. Last year, unemployment was under 6%, it is currently at 6.5% and continues to rise. We expect it to top 8% before the economy turns around next year.
The massive government stimulus packages will top $1 trillion and likely take 2-3 quarters before the full impact of their economic benefit is felt. However, there are already some signs of improvement. The bond and credit markets have seen the beginning of a reduction in numerous risk spreads. This is an indication that money is beginning to circulate through the economy.
Usually during stock market declines bond prices move higher. However, from the middle of September to the middle of October this was not the case and many investment grade corporate bonds also lost 10% to 30% of their value during the panic selling. In the last several weeks as risk spreads have reduced, the normal relationship is being reestablished and bond prices are holding steady or moving higher even while the stock market declines.
As the overall political, economic and market conditions remain unclear and unstable, we understand that stability is at a premium. Thus, we continue to review the vast securities world for positions that will benefit your portfolio. Our approach is three fold:
1. Hold a majority of the portfolio in very safe securities where the yield is moderate (4% to 6%) and the risk to principal and volatility are very low.
2. Continue to hold only a small portion of the portfolio in the stock market.
3. Staying vigilant by watching the markets and looking for opportunities. We have found many securities that will add great value to the portfolios once the markets are more stable.