Investors want certainty when it is hard to find
Market sentiment turned very sour as we exited the second quarter and this sentiment
persisted through early July. Time and time again, the Greek debt crisis reached a point
journalists called the end of the road, only to see no resolution of any kind. In fact,
debtors and creditors seemed to move farther apart post an impromptu referendum in
which the population was asked to vote on a complicated and technical issue that they
were given no time to understand. At the same time, the meteoric rise of the Chinese
market opened primarily to locals came crashing down. Daily intervention by central
policy makers failed to stem the flood of selling by over-leveraged, under-experienced
investors. Again, journalists found fodder to call the end of days for the second-largest
economy in the world based on the wild gyrations of the underdeveloped financial
market. And if that were not enough, the United States also showed that trading halts
are not something only for emerging markets. A technology glitch from a software
upgrade caused the venerable New York Stock Exchange to stop trading for several
hours, demonstrating just how vulnerable exchanges can be on any given day.
With so many uncertainties peaking at the same time, it is little wonder we saw global
growth-related assets fall off. Equity markets sold down to varying degrees, with the
U.S. preserving capital well relative to non-U.S. counterparts. Oil prices fell 15% in less
than a week and copper prices followed suit. Financial contagion was on the lips of
investors, once again fighting the last war they did not anticipate – the impact of
subprime debt on the global banking system in 2007 and 2008. It seems only
appropriate to say the financial markets are in a mood of wait and see. “Show me the
money!” they say. Will Europe succumb to the moral hazard of Greece desiring to vote
itself a better negotiating position? Will the Chinese equity market decline cause
political unrest in China or disrupt the fragile transformation of growth drivers toward
consumption? Will the fall of oil prices cause mass defaults in the energy industry and
jeopardize the volume growth we have seen? Will the Fed act too quickly to raise rates
in these tenuous conditions and create a down-leg into the next economic cycle? Will
earnings growth be sufficient to justify valuations?
On the following pages, we will detail our outlook to these and other questions. We will
also explain why, in our opinion, the depression of sentiment weighed upon by
uncertainty will lift. It will take time for the facts to reveal themselves, but as they do
we expect our core investment themes to perform well. If history is any guide, by then
the market attention will have moved on to the next wall of worry to climb.