Despite generally good news on the economy and corporate earnings, global equity markets are in the midst of the steepest correction since the recovery rally began last March. The week’s peak to trough decline for the S&P 500 was over 5%, and the index is now down over 7% from the January 19th high. A late flurry of buying allowed markets to stage a near 2% rally from the worst levels on Friday, and the Dow Jones Industrial Average managed to close above 10,000.

The catalyst for much of this volatility appears to be increasing fears of sovereign credit risk contagion. Greece is clearly in trouble, with a budget deficit of near 13% of the country’s gross domestic product, and total government debt of 113% of GDP. Greece is a very small component of the global economy with an annual GDP of around $350 billion (about 2.7% of Eurozone GDP), but history is loaded with examples of small problems that ultimately caused substantial economic damage (remember how the risk of subprime mortgages was “contained”).

However, rather than being simply a cause of the market decline, Greece is just another reason to be wary of lofty stock valuations following the huge rally from the March 2009 lows. In fact, stocks have struggled on several occasions since mid-January following the release of otherwise positive news. Some examples: nearly 80% of companies have exceeded earnings expectations; U.S. GDP expanded by 5.7% in the fourth quarter; and Friday’s report of January employment was generally as expected and the unemployment rate actually fell. An old stock market adage seems appropriate today – “the reaction to news is more important than the news itself”. Recent reaction to news suggests that good news is already priced into stocks, requiring significantly better news to drive the markets higher.

The one asset that has stood apart during the stock market’s troubles has been the U.S. Dollar, which is closing in on a near 10% rally from its 2009 lows. As the dollar appreciates in a flight to quality, risky asset classes are declining, especially the ones that performed the best last year. We continue to remain cautious with a focus on high quality stocks and bonds.


This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the Funds or any stock in particular, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts.

There are risks involved with investing, including loss of principal. Current and future portfolio holdings are subject to risks as well. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Narrowly focused investments and smaller companies typically exhibit higher volatility. Bonds and bond funds will decrease in value as interest rates rise. High-yield bonds involve greater risks of default or downgrade and are more volatile than investment-grade securities, due to the speculative nature of their investments. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume.

Diversification may not protect against market risk. There is no assurance the objectives discussed will be met. Past performance does not guarantee future results Index returns are for illustrative purposes only and do not represent actual portfolio performance. Index returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index.