The second quarter of 2009 produced the best stock returns in over ten years, with market averages up 16-17%, and our stocks significantly outperforming. Due to the market travails of last year, we are not yet in a celebratory mood. A fair conclusion, however, is that the earlier risks of a “total financial meltdown” are now off the table. As analysts, we are back to dealing with the somewhat more mundane issues of earnings and growth, and certainly whether the risk of higher inflation is “around the corner.”
In the first week of July, there has been what we believe to be a natural correction (after a 40% gain). Tomorrow begins the quarterly earnings season, and we believe that expectations are unusually low, paving the way for the opportunity for positive surprises. Our relative optimism is also a function of estimates that somewhere between $3-5 trillion in assets are sitting in money market funds. (In other words, cash on the sidelines.) We believe this money and the fiscal stimulus effect will, together, act as a shock absorber to the market as investors gain confidence over time in an economic recovery.