In recent weeks, we have received economic data that confirms that the global economic expansion that began in 2002 is in, or entering into, a period of recession. Though there is the possibility that recession may still be averted, it is becoming less likely as the momentum of negative data continues to mount. As you know, economic stability plays a key role in our investment strategy and, given this likely turn of events, we thought we would share our thoughts and strategy with you.

First and foremost, economic recessions are relatively short affairs in which economies have historically experienced negative growth for between 9-15 months – we expect that this recession will be of normal duration. In addition, our research suggests that this recession will not be confined to the US, but will be global in nature.

Historically, stock market indexes decline by approximately 30% in periods of recession. However, markets typically fall prior to the onset of a recession and begin their recovery before economic growth reinvigorates – a true sign that stock markets are a future discount mechanism. Accordingly, today’s stock markets have declined about 17% from their highs and most of this decline occurred before there was real evidence of recession. If this recession is typical – which we think is likely – the current stock market retracement is about half over. Though the next few quarters may continue to be tough for market indexes, we fully expect stocks to rebound significantly prior to better news about the economy. This may occur prior to year’s end. In the meantime, as you know, we continue to manage downside risk by maintaining higher than normal money market balances and bond exposure, as well as our continued commitment to employing stop loss orders on your economically sensitive companies.

Though we think the likelihood of avoiding a recession is slim, it is possible that a significant economic stimulus (such as an abnormally large Federal Reserve interest rate cut) could rescue the economy. In any event, we will be watching these economic issues and data points very closely and we will be prepared to change our strategy if necessary.

Recessions typically occur about every 8 years, making this one a tad early. However, once it passes, we will likely have another 8 years of global economic growth ahead of us and a great environment to more easily enhance your wealth.

As always, please feel free to let us know if you have any questions about our work or if you would like to set up a meeting to review your portfolio.

Sincerely,

James E. Demmert
Managing Partner