Weekly Update

2012 is very quietly turning into a very good year for the US equity markets.  With almost three quarters of the year in the books, the SPX index has risen roughly 16% so far this year.  If the index was to finish the year at this level, it would qualify as the 2nd best performance since 2003 and the 3rd best since 1999. If the current pace of gains were to be continued through the 4th quarter, the index would post a gain of around 21%, which would eclipse 1999, but still leave it just behind 2003 and 2009. What is really interesting is most investors don’t believe the markets are up much this year.

Of course nothing is guaranteed in financial markets and it may be that the market has run ahead of itself, only to deliver a painful pullback in the weeks/months ahead.  We definitely believe this is a possibility, but with the open ended QE3 from the Federal Reserve, we do not expect things to play out this way.  If the market does sell off it will likely be short lived, unless there is some sort of external shock.  The market was resilient in the face of significant pressures during the summer and now that governments are continuing to provide significant liquidity, this should provide some support to market prices.

Moreover, it is becoming increasingly clear to the global investor that the US equity market represents leadership at the current time and it is the domestically focused sectors within this market that have generally offered the strongest returns in recent months.  We would expect the quarter end allocation process by institutions to reflect this understanding with the top sectors gaining the most in the final weeks of the quarter.

Our greatest concern regarding QE3 by the Federal Reserve was that it was not only unnecessary, but may in the end prove to be harmful to the long term fixed income marketplace and cause a significant rise in inflation in the not too distant future.