Blog - June 2013 Market Letter


Jeff Cedarholm
President
Chief Investment Officer

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It’s Complicated.

Nancy Meyers, 2010

Do you remember, years ago as a child, when you had to go to the doctor?  Usually you were a little scared, or maybe downright frightened, at the prospect of who knows what prods and probes, and heaven forbid, shots that might be coming your way.  The nurse or doctor would always say that it’s going to hurt a little, but in time, it would make you better, or even make you well.  Good grief, many times I didn’t even know I was sick!  Squirming, crying or even hiding were all unsuccessful tactics, and generally, what was supposed to be a calm day turned somewhat volatile.

Now imagine the global economy being sick, and not a little, but a lot.  The Federal Reserve and central banks around the world are pushing the “medicine” of quantitative easing into the system at a rapid rate.  Finally, they see the patient improving enough to just hint that it is time to cut down the dosage if improvement continues.  This is good, right?  Well yes, but certainly uncomfortable.  The slow withdrawal of the stimulus, “medicine” by any other name, also means a normalization of interest rates over the next three or four years.  Again, it is very uncomfortable for the fixed income market, but ultimately good for the patient.  Why is it, that just like a child going to the doctor, the global stock and bond markets can’t see that this is actually good news, and not be quite so volatile?  It’s complicated!

After the financial crisis in 2008, we were all afraid of a market collapse.  Even during the period since March 2009, a slow, choppy bull market, investors were much more concerned about downside risk than upside returns.  While we are now concerned about a bear market in fixed income, at least for four or five years, we are long-term bullish on global equity markets.  And while it may be uncomfortable short term, this pull back in the stock markets will provide us with lower prices and higher expected future returns.  Over the past weeks, we have sold those fixed income holdings that we thought would depreciate the most in a rising rate environment.  Most of this money has been held in cash, awaiting the trip to the doctor and the inevitable volatility that would follow.  As prices fall, we intend to follow Warren Buffett’s advice about being greedy when others are scared.

So it’s uncomfortable and complicated.  Usually, so are trips to the doctor! As always, thank you for being clients and your continued confidence in the Longview team.


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