October 4, 2011

We believe the equity markets have overshot to the downside. The markets are very oversold due to excessive worry and fear that are not supported by economic fundamentals in the U.S. The recent U.S. economic data is not consistent with a recession and yet the market is pricing for one. Fed Chairman Bernanke reiterated this morning in testimony to Congress’ Joint Economic Committee that the “Fed will continue to closely monitor economic developments and is prepared to take further action as appropriate to promote a stronger economic recovery in a context of price stability”.

We do not believe that this is or will become 2008 all over again. Equities are cheap, monetary stimulus is abundant, interest rates are at historical lows, and the world economy is still expanding, although at a much slower rate than last year. In August, we had a perfect storm of events causing the S&P 500 to drop over 18%. As the world economy began to slow and the European debt crisis intensified, the political system in Europe appeared to be in disarray and the U.S. faced political gridlock over the debt ceiling negotiations and budget deficit. Investor confidence took a nosedive leading to panic liquidations of risk-based assets. All of this increased the risk of recession.

However, during this period of extreme uncertainty, it is important to keep in mind the following positive developments. Oil prices have fallen 33% from their April highs. The ISM services and manufacturing indices are both signaling expansion. Retail sales are growing at 3.8%. Money supply growth as measured by M2 is expanding. Interest rates are at historic lows. The banking system is much better capitalized and less leveraged than 3 years ago. Corporate balance sheet fundamentals have never been stronger with cash positions at all-time highs and debt refinanced at historically low rates.

Although the U.S. economy is moving at a snail’s pace, it is not contracting. Much of the market’s current anxiety is due to the political posturing in Europe with what to do about a bailout of Greece and preventing a liquidity squeeze within the European banking system and Italy. At this point in time, we believe the EU finance ministers, the ECB, and the IMF will find a way to contain the debt crisis and recapitalize the European banking system. However, the process will most likely remain slow and volatile. Until signs emerge that this is indeed what will happen, we are remaining defensive and underweight risk-based assets.

As of this writing, the S&P 500 Index is finding support above the 1090 level which would mark a 20% drop from this year’s high reached on April 29th (1363) and meet the technical definition of a bear market. If we close below the 1090 level, then we could be in for more downside from here and we’ll look to further reduce risk-based asset exposure. If the market holds above this key support level (1090), then we are comfortable with our current tactical positioning and may look to further change the composition of specific asset classes (i.e. favor income over growth) in the near future.

Andrew C. Zimmerman Chief Investment Strategist

Notes: The DT Investment Partners’ Market Commentary discusses general developments, financial events in the news and broad investment principles. It is provided for information purposes only. The material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Investments in various asset classes entail different investment risks. For example, small cap equities tend to be more volatile than large or mid-cap equities.  International equities and emerging markets have exposure to currency fluctuations, foreign taxes, political instability and the possibility for illiquid markets.  Fixed income investments involve interest rate and credit risks among others. Real estate investing includes risks such as declines in value of real estate, changing economic conditions, tax laws or property taxes. Commodities’ investing is highly volatile and subject to changing economic conditions and the vagaries of speculators among other risks. Further, diversification and strategic or tactical allocation do not assure profit or protect against loss in declining markets. Index performance returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index.  Past performance does not guarantee future results.