The US stock markets have displayed strong underlying strength over the past several weeks. Both good news and bad news has been taken in stride as every short-term decline has been greeted with buyers. Although the markets remain somewhat volatile, some stability has returned in recent weeks, which in turn has brought about an increase in investor confidence.
Perceptions are changing with respect to the stability of the global financial system and the possible turnaround in the global economy. The timing of a turnaround in the global economy is at best a guess, given the multitude of uncertainties. However, credit conditions are improving, credit markets are loosening, interest rates are very low by historical standards, and credit spreads are much better, although still elevated. The recent upswing in the US markets feels like participants are buying stocks just because they are going up, not because they are convinced a turn in the economy has occurred. Whether this is true or not remains to be seen.
We expect we will have more clarity on an economic turnaround after the first significant decline (since this recent upswing began) in the market occurs. Since this financial crisis began, credit markets have dictated the direction of stocks and we believe any positive or negative development in credit will have an impact on stocks. Therefore, if credit conditions continue to improve and institutional investors are confident in the improvement and become large buyers into any stock market decline, this will be a very positive sign and should indicate an overall improvement in economic conditions. It would be at this point one would want to become much more positive about stocks and adjust allocations accordingly.
We also remain long-term positive on commodities as they remain a finite resource in a world of seemingly infinite demand. With major cuts in production over the past six months across the commodity spectrum, we believe these "hard assets" could offer the best long-term appreciation as global economic conditions improve and supplies become scarce.
