As you know, over the past year we have remained concerned about the global economy and the heightened risk of recession. In keeping with this outlook, we have increased our risk management of your investments throughout this period. Though stock markets have recently advanced and retraced some of their previous decline, economic data points continue to gather downward momentum and are in recessionary territory. Given this disparity, we remain cautious about the global economy and the risks to global stock markets in the months ahead.

Historically, stock markets decline about 30% during periods of economic recession. Moreover, these declines last an average of 13 months. Therefore, investors lose both the time value and dollar value of their investments during these periods – a risk we feel is worth trying to mitigate. In January, stock markets were down as much as 19% from their all-time high and with recent strength are now down about 10%. Unfortunately, recent economic data points continue to gather downward momentum and the 100% rise in oil prices in the past 12 months is likely to put additional pressure on an already struggling economy. This recent data and our research suggest that we are in a recession or close enough to warrant continued risk management.

However, keep in mind that this is not our team’s long term mindset by any means. Recessions usually last 9-15 months and are followed by periods of tremendous stock market appreciation – we do not believe that this period will be any exception. In past cycles, stock markets have begun their ascent as soon as economic data bottoms, but prior to recessions ending. Therefore, we need the economic data to stop getting worse before becoming more growth oriented, and we are confident that we might see this in the third or fourth quarter of this year.

We will be monitoring these data points closely. In the meantime, we will continue to manage the risk of your investments through higher than average money market and bond balances, economic sector weightings and stop loss management. Keep in mind that we do not place stop loss orders on your entire portfolio – only those areas that we think would be vulnerable in a weak economy. The risk to our cautious view is that economies get much better faster than expected (which we think is unlikely) and markets begin to dramatically advance. In such a case we can – and would – quickly become less defensive. In fact, we keep a continuously updated “buy” list should this come to fruition.

We look forward to the point of this economic cycle when economic data stops getting worse and global stock markets look more opportunistic. We hope that this update finds you well. If you would like to get together or have any questions about our work please let us know.

Sincerely,

James E. Demmert
Managing Partner