Special Market Commentary

by Jim Baird on September 26, 2011

Global markets sell off: Is recession in the cards?

Executive Summary

  • A combination of the intensifying crisis in Europe and fears of a potential recession (in the U.S. and globally) has spurred a flight to quality and abrupt
    contraction in equities and commodities.
  • The U.S. Treasury market appears to be pricing in a “lost decade” of economic
    growth ahead for the U.S., similar to what Japan has experienced, although we believe that to be an unlikely scenario.
  • The probability of a recession has risen in recent months. Although equities
    have corrected, if the economy does enter a recession, further declines in
    equities should be expected. The potential for policy mistakes remains a
    significant wild card.
  • A high volatility/low return equity environment could persist for some time, but investors with a sufficiently long time horizon should be rewarded with returns from their equity investments that are superior to Treasuries or cash.

Global equity and commodities markets have experienced fierce selling pressure recently as a result of a number of factors including the escalating crisis in Europe and indications that the U.S. (and potentially Global) economy is heading back toward recession. In a statement describing its most recent policy move (pejoratively named “Operation Twist”), the Federal Reserve signaled that economic growth has continued to slip to a perilously low level. Yesterday, regional Purchasing Manager Index (PMI) data issued for both the Eurozone and China came in below 50, which is a signal that manufacturing growth is at the cusp of contracting in those regions. This information, on top of the concerns once again rising about the sovereign debt crisis in Europe, was enough to push the S&P 500 down 3.19% for the day on Thursday September 22.

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