4th Quarter 2011

Summary:The Wall Of Worry

• Entering the fourth quarter, worries about the U.S. economy’s backsliding into recession seemed to reach an extreme just as a number of economic reports – retail and auto sales, construction spending, architectural billings, etc. – began to show encouraging data. Since then, U.S. economic results appear to have improved further.



• Given the FOMC’s recent assessment of the economy, the committee continued to call for loose monetary policy (the target range for the federal funds rate remained at 0% to 0.25%) and the continuation of the Maturity Extension Program (Operation Twist). Presently, the Fed anticipates that economic conditions will warrant these low rates through mid-2013.



• Currently, the dividend yield of many U.S. companies exceeds the 1.9% yield of the 10-year U.S. Treasury. Furthermore, corporations generally appear to be in the best financial condition in many years. Extremely low interest rates provide corporations with a generationally low cost-of-capital.



• The probability of finding an immediate and complete solution to Europe’s financial troubles is low. In the interest of helping Europe and the global economy muddle through, 48 central banks around the world have cut interest rates in the past several months. Over the same timeframe, U.S. economic data have improved. The equity markets have responded but remain inexpensive versus historical ranges, in our view.

 

Download the full Investment Management of Virginia Third Quarter Commentary in PDF.