Equity markets the last few weeks have exhibited extreme volatility. Though your portfolio is structured to weather such storms, you will notice greater fluctuations in your portfolio's value. Approximately 11% of the decline has happened in the last week. Last summer, the markets experienced an eerily similar decline of 17%. This was followed by a quick market recovery.
Markets hate uncertainty and there has been a lot of it lately. First there was the political fight over raising the debt ceiling that was settled only after much internal strife and politicking. At the same time second quarter Gross Domestic Product (GDP - the sum total of all goods and services produced in this country) were weaker than expected. This was followed by a poor purchasing manager survey, disappointing consumer spending report and weak job creation.
The final knife fell with Standard & Poor's (S&P) downgrading the U.S. government's credit rating. The impact of the ratings change on the Treasury market should have been negligible. It was the timing of the S&Ps action that was significant. It came at a time when the markets were deaing with many issues and unknowns: the housing downturn, the deleveraging of households and businesses, the European sovereign debt crisis, and the end of the Feds QE2 (I talked about this in the last two newsletters). The downgrade was the tipping point for the equity markets. Ironically, the downgraded U.S. debt (Treasuries) has performed well increasing in value and pushing interest rates down further. The Federal Reserve did step in yesterday and take the unprecedented action of saying that interest rates will remain low through June 2013. This has helped take some uncertainty off the table but not enough.
Despite all these problems and the increased volatility in the equity markets, I do not think we are headed for another recession. Instead, we are seeing the markets grappling with the new reality of slower growth in the developed countries. Many of our multi-national corporations are poised to take advantage of this shift but it won't help with job creation in the U.S. So we will dodge the recession bullet but it will feel like a recession with high unemployment and low wage growth.
Despite the ishares S&P500 EFTs being down 5.3% year-to-date at Tuesday's close (August 9, 2011) many of the assests in your portfolios continue to perform well. Pimco Global Multi Asset, Pimco Foreign Bond Unhedged, Pimco Developing Local Markets, Pimco Total Return, Pimco Unconstrained Pimco Commodity Real Return, and Thornburg bond funds are all positive for the year and in several cases have racked up double digit returns. These funds have performed well and are keeping your portfolio stable in the face of recent equity declines.
I appreciate your continued confidence. I am gratified to see the checks and balances in everyone diversified portfolios working so I do not anticipate taking any drastic actions. I anticipate that sometime this year the equity markets will rebound off these oversold lows. In the meantime all the hedging strategies embedded in your investments will keep your portfolios from feeling the full brunt of this financial storm.