Market News Q3 2009

The trend in consumer retrenchment has not changed with the strong stock market performance.  Outstanding consumer credit continues to drop by more than $10 billion per month.  As we have said before, we believe this to be a multi-year trend rather than a short-term phenomenon.  Anecdotally, many of you are feeling the wage pressures and job losses noted in broad economic statistics.  Despite improvement in many aspects of the economy, job losses remain elevated.  In the long run, job and wage growth is the only true sign of a healthy economy.  This remains our most significant concern for the coming years.  These concerns are offset to some degree by much healthier corporate balance sheets on average, but with consumer spending accounting for more than 2/3 of the economic activity, you can see why our concerns are focused Mr. and Ms. Consumer. 

 The typically higher volatility asset classes continued to lead the rebound in the third quarter.  Real Estate stocks followed a 30%+ second quarter bounce with another 30%+ third quarter.  Many listed (i.e. publicly traded) REITs managed to refinance substantial portions of their debt early in 2009 dramatically reducing the likelihood of bankruptcy for many.  International and Small Cap stocks continued to outpace Large Cap stocks, but not by an unusually large spread in a positive market.  Fixed Income, which often moves inversely with equities, actually improved on a solid 2^nd quarter with nearly 4% gains in Q3.  As noted last quarter, those of you who have invested in more opportunistic bond funds we have recommended this year saw much larger gains.  The rally was strong enough to get all asset classes into positive territory, not only for the year, but over five and ten year time periods.  Admittedly, average bond returns remained higher than all asset classes over one, if not both of these longer time periods.