It was bound to happen. With all the policy inputs on the economy and the meteoric rebound in the equity and credit markets, it was only a matter of time before the recovery stuttered. The gears of the recovery began to grind a bit in the Fourth Quarter as we saw a continuance of the really that began in March, but these gains came at a more tepid pace than those of the prior two quarters. After recovering from a failed rally in october, equity markets traded in a remarkably narrow 3% range for much of November and December before finally breaking out just before Christmas. This lack of volatility was surprising, given the monumental battle for healthcare reform that was raging on Capitol Hill.”
“Pundits are certainly wasting no time weighing in with their opinions on the path ahead. Inflation or Deflation? A resurgent economy or a double-dip recession? A continuation of the stock market rally, or a correction? The smartest thing that one could say is likely, “I don’t know.” There are just simply too many inputs that have been placed into the global system to predict, especially when we move beyond the question of direction, to forecasts of timing. We truly are in uncharted waters. One thing is certain, however, when you are dealing with atypical times, nothing is certain!
So how does one strategize in this type of environment? Our suggestion is to position around the probability bu watch the tape for the possible. So here is what we think is probable:
1) The ‘fits and starts’ recovery will likely continue to accelerate.
2) GDP growth routinely comes as we recover from peak unemployment.
3) Earnings and the Markets are likely to advance signifcantly from here.
4) Tomorrow’s Dow 15,000 or 20,000 might not buy you as much as you think.