Comments on recent market volatility

The recent increase in market volatility has been caused primarily by two factors: 1) recent renewed concerns about Europe’s economy and debt problems, and 2) intensified concerns over the U.S. fiscal cliff. With respect to the European situation, our read is it has not changed substantively from our last commentary we provided to you in September. Europe is in the painful throes of a long process of addressing its debt and economic problems.  Europe is in a recession and more recently the recession appears to be having a greater impact on Germany, which has been fairly immune up to now.  Within the past week, the Greek debt crisis has resurfaced because Greece has a major debt payment due this month which, of course, it cannot make without further IMF loans. Also, this week the economic outlook for France has come into question. All of this has raised concerns for investors, but none of it is really “new” or particularly unexpected.

We have believed and still believe that Europe will continue to make slow progress in addressing its debt and economic problems, but that the process will a) take years and b) will be turbulent from time to time. As we have stated previously, we are encouraged by recent moves by the IMF and ECB to provide increased liquidity to the Euro monetary system as well as a backstop facility for debt held by major European banks. This will help to buy time as Europe continues to wrestle with its debt problems.

The problem of the U.S. fiscal cliff is not “news”. We pointed out in our September commentary that we expected increased investor focus on the cliff following the election and that this would result in increased market volatility. This has occurred. The concern for investors is the increased risk of economic havoc and recession should the cliff issue not be addressed or addressed too late. We were encouraged by President Obama’s comments on November 14 in which he went out of his way a couple of times to acknowledge the opposition view, which may intimate a greater willingness to make a pragmatic compromise.

We think a compromise on the fiscal cliff can and will be reached, hopefully by Christmas, for the following reasons: 1) a newly re-elected President is in a stronger position to broker a deal; 2) we believe President Obama wants to leave a strong legacy and will be motivated to make a reasonable compromise happen; 3) it is highly politically risky for Republicans in the House to remain overly obstructionist; 4) given the gravity of the cliff, there is and will be significant pressure on both the House and President to reach a compromise.

While we expect market volatility to continue for a while (and the market may go down a bit further) we remain optimistic on the ultimate outcome of the cliff issue. We therefore continue to advocate staying the course and we do not feel now is the time for drastic changes in strategy. We would also reiterate that trying to time the market to play short term trends is not only extremely difficult but is also risky because it can place a well-designed portfolio strategy and financial plan at risk should short term guessing on market direction prove to be incorrect. Also, quality, large-cap stocks remain attractive with underlying support found in reasonable valuations, strong cash flows, and our expectations for continued earnings growth in 2013. As always, we are monitoring these events and we are prepared to take action if we believe events so warrant.