July 2009 - Economic Outlook

The last three months have highlighted the challenge and risks involved in seeking safety in battered markets. The recent rebound in risk assets from the early March 2009 trough has been fast, powerful and robust. Any asset class with a hint of risk tended to rally; specifically, higher risk assets such as emerging markets and high yield have rallied strongly as investors’ appetite for risk has widened. This renewed appetite also caused the perceived “risk free” treasury asset class to post record declines.

The initial phase of a market recovery tends to be front loaded with the bulk of returns earned early on in a market rally. This combined with the fact that an all-clear sign is never visible as to when to reenter the markets are some of the key reasons why market timing does not work and why a disciplined long term philosophy to portfolio management is the most prudent course of action. Money market assets have provided some of the fuel to move risky assets higher. As a percentage of U.S. equity market capitalization, money market assets hit record levels near the equity market trough in March 2009. At that point in time, these assets could have bought close to 50% of the overall U.S. equity market capitalization. Money market assets now stand at approximately 40% of the entire U.S. equity market, but continue to remain elevated and much higher than the 27% peak set during the 2000-2002 bear market. Significant buying power remains sitting on the sidelines.