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The Economic Recovery Has No Clothes

While I believe that yesterday’s 512 point decline in the stock market (which marked the 9th largest single day point decline in history), as measured by the Dow Jones Industrial Average (DJIA), was extreme, I do believe that a form of a stock market correction, with respect to the now 29 month long bull market, was long overdue.

What likely transpired yesterday was that investors finally had the courage to shout aloud in a crowded courtyard, “The economic recovery has no clothes,” despite repeated claims by the Federal Government and certain economists to the contrary over the past 6-12 months.  While historical research has shown that typical stock market recoveries generally precede economic recoveries by 6-9 months; perhaps this stock market recovery broke out of the starting blocks too soon.   While many encouraging signs pointing to a sustainable economic recovery have emerged over this timeframe in terms of corporate earnings (according to Bespoke Investment Group, 70% of companies that have reported 2nd quarter earnings have exceeded estimates thus far), GDP growth (albeit modest and below historical averages) and mergers & acquisitions (M&A) activity (according to Reuters, announced M&A deals in the second quarter totaled $611 billion), many headwinds for the U.S. economy still exist.  These headwinds include a stubbornly high unemployment rate, ongoing elevated levels of jobless claims, high commodity prices, a lackluster residential real estate markets and increasing sovereign debt problems in Europe and on our homeland – despite the recent agreement on raising the Debt Ceiling.  While I do not believe, based upon the economic data currently available, that the slowly growing economy is at a great, immediate risk of slipping into a double-dip recession, I do believe that this economic recovery may be an arduous, more drawn-out recovery than many initially anticipated.

Hence, in our opinion at Hennion & Walsh, investors would be wise to use this opportunity to reassess their existing asset allocation strategies and ensure that they have considered a wide range of available asset classes and sectors in order to provide for the diversification necessary to withstand market volatility and an uncertain future economic and political climate.   Opportunities for risk adjusted growth can still be found for the balance of 2011, in our opinion, if investors consider areas such as, but not limited to, commodities (Ex. agricultural, precious metals, industrial metals and energy), currencies, fixed income, emerging markets, frontier markets, Utilities and more value oriented U.S. equity asset classes*.

With this said, it is important not to abandon longer term asset allocation strategies as a reaction to short-term market movements.  For example, according to an August 4, 2011 Wells Fargo Advisors Strategic Insights report, “History shows that the stock market has a 10% correction about once a year.   Last year, the stock market declined 17% between late April and early July.”

*Hennion & Walsh Asset Management currently has allocations to several of these areas within our proprietary managed portfolio strategies.   Asset allocation does not ensure a profit or protect against a loss. Investing involves risk and investors may incur a profit or a loss. Past performance is not a guarantee of future results.