INSIGHTS

On October 19, 2011

Is U.S. Entering Double-Dip Recession?

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An article posted on Advisor Perspectives by Bob Doll, the Chief Investment Strategist at Blackrock, gives their view of Europe and the U.S. economy and markets. It is well worth the five-minute read. The big debate in the United States is whether we will enter a double-dip recession. We simply don’t know if that is true and we believe that the real issue is not whether we will have a recession, but whether the steep drop in financial asset prices is providing opportunity or is there more risk even at depressed levels? This current swoon started with the financial companies that market participants drove down with the fear that their exposure to Europe might be toxic. This week, we saw one-after-the-other report earnings that – with the exception of Goldman Sachs – look good. Credit challenges continued to ease and loan growth is modestly better. Banks continue to fund themselves paying nearly nothing for deposits. Quite simply, we believe our financial system is in good shape, whereas European banks are much more at risk. Europe can fix its mess if it wants to. It is in their best interest to fix it, and it is critical to their survival to fix it. As ugly as it may be, they will get it repaired and their banks will survive, in our opinion.

Could this current drop in risk asset prices simply be a correction, or is it the start of something worse? I think we agree with Bob, noting that current valuations provide a great long-term entry point for risk assets. Our model tells us to be overweight credit exposure and underweight high-grade debt. We want to limit our duration risk and maximize our credit risk. We are currently near the top of a secular market for bond prices and believe that the future will not favor duration risk. Although we can’t tell you if we are going to have a recession, we can tell you that the markets are priced for it and recoveries occur after recessions. Our goal is to buy low and sell high. Albeit somewhat uncomfortable, we think this volatility has provided us with opportunity.

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the disclosures webpage for additional risk information. For additional commentary or financial resources, please visit www.aamlive.com/blog.