Commentaries
- Market View
The US stock market has staged a remarkable recovery from a year ago with the S&P 500 Index up 70% from its lows. Fourth quarter 2009 Real GDP expanded a very strong 5.6%. These signs of economic strength and confidence come at a time of unprecedented federal fiscal and monetary stimulus. The question is whether this nascent economic expansion can continue as these stimuli are reduced or withdrawnIndications of slowing US economic growth and a potential Greek debt default pushed the stock market and US Government interest rates lower in the second quarter. Correcting the credit excesses of the last three decades will take time. The impact of the 2009 Government stimulus package has peaked and future economic growth will increasingly rely on the private sector.
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The US stock market has staged a remarkable recovery from a year ago with the S&P 500 Index up 70% from its lows. Fourth quarter 2009 Real GDP expanded a very strong 5.6%. These signs of economic strength and confidence come at a time of unprecedented federal fiscal and monetary stimulus. The question is whether this nascent economic expansion can continue as these stimuli are reduced or withdrawn.
Download the complete commentary as a PDF - Market View
An economic recovery is underway and financial markets have responded strongly. Formidable crosscurrents remain and the current low interest rate environment presents challenges to investors. We continue to recommend a diversified portfolio of global and domestic high quality equities. New commitments to fixed income must be selective.
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The government has used many resources to help support the U.S. economy. Targeted stimulus is working, although questions remain whether it can spur longer term growth. Government stimulus has awakened fears of inflation, but additional forces have softened the effect so far. The recent stock market rally has been led primarily by lower quality companies that have rebounded after sharp 2008 declines. High quality companies offer superior risk adjusted prospective returns.
Download the complete commentary as a PDF - Market Update - Special Edition
With October close to setting a record for the largest stock market drop in a single month, below are a few observations and a review of Birch Hill’s approach to investing in challenging markets.
The Stock Market Downturn
Through the close of business last Monday, October 27, the stock market (as measured by the Standard and Poor 500 Index) was down 27% for the month of October and 42% year to date. If the market ends the year at this level, the 10 year total return from stocks will be negative for the first time since 1938. All stocks have been subject to indiscriminate selling. Earnings, dividends, balance sheets, and price earnings multiples do not seem to matter as investors adjust to the unfolding credit crisis, pending global economic downturn, and forced deleveraging of aggressive hedge fund portfolios. We think it is quite possible that the volatility of the stock markets will continue for some time. One observer called it a bear market on steroids...
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The Investor’s Tax Landscape
In 2003 the Federal tax rate on long-term capital gains was temporarily reduced to 15%, the lowest capital gains rate since the early 1930s. Unless the current law is changed, the Federal rate will return to 20% on January 1, 2011. Some in Washington have called for a capital gains tax rate increase before 2011. Others have said that the rate should move to 28%. While anticipating legislative changes is a professional sport that is generally best left to Washington insiders, the existing law is clear and the current inclinations of Congress strongly suggest that investors will pay a higher Federal capital gains rate in the not too distant future. In addition, a number of states that also tax capital gains may feel significant budget pressures in the next several years and as a result look to raise capital gains tax rates...
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