April 2009 - Is the Worst Behind Us?

Periods of negative economic growth always give investors cause for concern. However, the recent slump, which began in December 2007 as the US officially entered a recession, has been particularly fear-inducing. The downturn has been distinct in its ability to elevate the anxiety levels of many. The credit crisis presented unique challenges, causing all manner of financial assets, with the exception of treasuries, to retreat last year. The bear market was marked by periods of forced selling, as complex leveraged financial situations rapidly unwound. Price declines begat fear, which begat more selling, making the collective angst of the country palpable. During the first two months of 2009, markets continued to decline as policy makers struggled to find a way out of the morass. March, however, gave investors reason to be optimistic that the worst may be behind us.

US GDP Actual and Consensus Forecast
Source: Bloomberg

Extraordinary policy response has been working its way through the system since the fall of 2007. In response to the worst financial crisis in two generations, the Federal Reserve aggressively lowered short term interest rates. This policy has been supplemented with a commitment to keep interest rates low for an extended period of time.  Further, the Fed is now actively managing longer term interest rates for the first time in decades by purchasing treasury and agency debt in the open market.   Additional substantive monetary policy measures have been taken, which dramatically increased the amount of money in circulation. The ultimate effect of increased money supply has historically been an uptick in economic activity.

Beyond Federal Reserve monetary policy there has been an immense commitment to fiscal policy measures. A $180 billion fiscal stimulus plan in 2008 has been supplemented with a $700 billion financial bailout plan, a $300 billion housing stabilization program, and an additional $800 billion fiscal stimulus measure. Importantly, U.S. policy response has been coordinated with that of other nations.

We have seen significant improvement in money markets, interbank lending, and bond markets, and now see early signs of stabilization in the troubled housing sector. None of this is to suggest the current economic environment is robust, but rather the worst seems to be behind us.

As the economy moves from recession to growth and ultimately back to full employment, we will be closely watching for inflationary indicators. We will also be keeping close watch on the government's ability to manage an increasingly significant fiscal deficit.

This information has been developed internally and/or obtained from sources which Sand Hill Global Advisors, LLC ("SHGA"), believes to be reliable; however, SHGA does not guarantee the accuracy, adequacy or completeness of such information nor do we guarantee the appropriateness of any investment approach or security referred to for any particular investor. This material is provided for informational purposes only and is not advice or a recommendation for the purchase or sale of any security. This information reflects subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. This material reflects the opinion of SHGA on the date made and is subject to change at any time without notice. SHGA has no obligation to update this material. We do not suggest that any strategy described herein is applicable to every client of or portfolio managed by SHGA. In preparing this material, SHGA has not taken into account the investment objectives, financial situation or particular needs of any particular person. Before making an investment decision, you should consider, with or without the assistance of a professional advisor, whether the information provided in this material is appropriate in light of your particular investment needs, objectives and financial circumstances. Transactions in securities give rise to substantial risk and are not suitable for all investors. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of SHGA.