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TO SUMMARIZE OUR THOUGHTS 6/30/2010
The recession most likely ended last summer, but the fact that the end
still hasn’t officially been declared by the NBER is evidence of
how tenuous the economy remains. In spite of rebounds in various
economic indicators, this recovery, like the previous two, has been
less robust relative to the contraction.
In addition, the growth and stability that has been seen has thus far
relied on short-term inventory restocking or government programs that
are now completed or being wound down. We must now see if private
demand can pick up and if the recovery is self sustaining.
We are still far below output levels that existed before the crisis,
and whenever you have a subdued recovery, the chatter about a double
dip recession increases. However, it is natural for growth to
slow after an initial 12 to 15 month increase. Despite waning
confidence, there are indications an uneven, subdued recovery will
continue.
A double dip recession is exceptionally rare and has only occurred once
since the depression – in the 1980s. Today, interest rates
are extremely low and inflation is not an issue. Both are
expected to remain the same for a long time. At the same time, a
steep yield curve does not indicate recession and stock valuations are
still below typical levels during environments of 2-3% inflation.
The European crisis is a reminder of how interrelated the world is
today. In turn, market volatility increased in an instant.
However, throughout history spikes in volatility have coincided with
market lows.
Challenges persist, especially over the long-term. However, they
are well defined. Future equity returns will be subdued and
volatility less subdued, but unless government policies interfere to
the point where they smother out the fire, the economy will at least
smolder.
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