Merry Christmas

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In a shortened Christmas week, I wish each of you and your families a relaxing and enjoyable Christmas season.  In a period of extensive financial distress, I encourage each of you to reach out, and to the extent of your ability, to make life brighter for someone less fortunate than you.

This week’s blog post is an article I wrote for the December 21 edition of Inside Tucson Business.

Acknowledging Uncertainty Could Preserve Your Portfolio

December 21, 2009

The investment industry is characterized by bold pronouncements and confident forecasts.  Investment managers that develop a broad national and international following typically come across in the media displaying great conviction.  Investors gravitate towards such confidence, especially if it conveys a bullish message.

Such behavior became firmly ingrained through the decades of the 1980’s and 1990’s when stocks and bonds both provided outstanding returns without lengthy negative interruptions.  Nearly all investment managers produced excellent returns.  Doubts have arisen intermittently, however, through this first decade of the new century as stocks suffered two of their worst declines since the Great Depression, and bonds offered sharply lower returns than in the prior two decades.  Despite having endured seriously flawed forecasts in recent years, investors stubbornly continue to heed the predominantly bullish forecasts of investment industry “experts”. 

The common wisdom of such investment gurus is essentially to stay the course, invest for the long run, select an appropriate asset allocation strategy and rebalance to your chosen allocation periodically.  In a period of great financial uncertainty that advice could cost investors dearly.

Throughout my 40 years in the investment industry, I have never before seen economic or market conditions present such a broad spectrum of possible outcomes.  If all goes well from here, governments and central banks around the world will succeed in reviving economies still reeling from the worst recession since the 1930’s.  Residential real estate will stabilize and commercial real estate will be saved from declining into a multi-year funk.  Most importantly, consumers will regain confidence and will begin to spend again without fear of a darker tomorrow.  On the other hand, if unemployment persists, consumers could remain unwilling to spend for anything but necessities and may depress economic conditions for years to come.

From past experience we have been conditioned to expect that a recession continues for a few to several quarters, followed inevitably by a resurgence of business conditions which leads us to even brighter economic tomorrows.  We are dealing, however, with unprecedented economic conditions, so we have no clear guidelines as to how consumers and the body politic will respond to the unfolding drama.  I strongly believe that the critical variable will be the psychological response of global consumers.

Bulls on the economy and the investment markets expect that consumer response to the current recession’s end will resemble that which we have seen over the past few decades.  Bears fear that the unprecedented levels of debt built up over the past quarter of a century have set the stage for consumers to emerge from this recession more circumspect with respect to spending versus saving.  As leveraged as our U.S. economy remains, any significant consumer slowdown will greatly diminish business profitability and consequently the outlook for our equity markets.

We cannot know how consumers and investors will emerge from this recession.  We do know, however, that the vast majority of investors, especially institutional investors, have structured their portfolios based on confidence that market outcomes will resemble those of the most recent several decades.  Should the record levels of government stimulus fail to sufficiently offset potentially growing amounts of collapsing debt, we could experience serious economic and market declines that far surpass those anticipated by most investors.

Equities could soar if the world’s central banks continue to flood the financial system with newly minted money and prices of assets were to float upward.  Equities could plummet if unprecedented levels of debt collapse as government initiatives fail to reignite consumer confidence.  Government and other top quality bonds could be the performance stars if serious recessionary conditions should push interest rates below recent historic lows.  Virtually all types of bonds, however, would be decimated if the flood of new money ultimately results in runaway inflation.

Should the government’s unprecedented financial measures ultimately prove successful, we could see a return to the glorious days of the 1980’s and 90’s where traditional asset allocations proved consistently successful, and all asset classes rose.  On the other hand, if the flood of new money leads to an interest rate surge, both bonds and stocks could suffer badly for years, defeating even the most prudent of traditional asset allocations.

No one knows how the economic and securities markets will unfold over the next several years.  Investment analysts offering convincing guidance are making best guesses.  Most have offered less than helpful advice through the perilous last decade.  Investors will benefit by abandoning traditional fixed asset allocations and remaining flexible to avoid potential worst case scenarios and to take advantage of new and possibly non-traditional investment opportunities.

Tom Feeney is the chief investment officer for Marathon Asset Management Co, a registered investment advisor with the Securities and Exchange Commission, and for Mission Management & Trust Co., a full service trust company regulated by the Arizona Department of Financial Institutions. If you would like to explore the management of an investment portfolio of $1 million or more by either of the firms, you are invited to email your interest to or call (520) 529-2900 to speak with one of the Portfolio Coordinators.