May Market Commentary
May 7, 2010
By John Apruzzese
Parter, Equity Portfolio Manager
Summary
The US recovery is advancing at a more rapid pace than expected, led by corporate profits. The economy is adding net new jobs, which has been the biggest concern. We think this favorable trend will continue, with subsequent expansion powered by growth in demand from emerging-market consumers. Reflecting the improving economy, the stock market has come a long way. Despite this generally favorable outlook, several fundamental uncertainties have been rising. Europe's sovereign debt crises are front and center, followed closely by policy actions in China designed to deflate a real estate bubble. Adding to these worries is the prospect of significant financial reform following the US Senate's recent demonstration of its limited understanding of financial markets. What's more, the tragic oil spill in the Gulf will probably slow deep-water drilling and increase its cost.
Yesterday's stock market action was also unsettling. No one knows just what caused the sudden, extreme drop or the partial recovery, but the market appears to have a weak spot in its technical structure, which has changed significantly in recent years. We are only now seeing the potential consequences when more than half of the market's volume comes from high-frequency trading systems that deal in milliseconds without human intervention.
Considering all these factors, we retain our neutral exposure to equities and continue to emphasize balance sheet strength. We expect the market to pause near current levels, with heightened volatility as investors await resolution of some of the uncertainties mentioned above. We recommend that portfolios keep equity positions at the agreed policy allocation, taking profits if equities have moved above that level. The main risk we see is that Europe fails to address sovereign debt concerns successfully, a situation we are watching closely.
John joined Evercore Wealth Management as a founding partner in 2008 and has more than 24 years of experience managing balanced investment portfolios for affluent individuals and their families. You can email him at apruzzese@evercore.com.
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