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Current Market Conditions Update

Current Market Conditions Update

By John McCord Cardinal Point Wealth Management
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The S&P 500 is down approximately 13% during the past three weeks and we have experienced 4%-7% daily market swings the past four days. European and Asian markets have not fared any better as most have experienced even steeper losses. Clearly, periodic retrenchments do not bode well for investor confidence. Is the glass half-full or half-empty? As usual, investors are asking themselves this question. It only takes one minute of scanning the news to realize that the same information can be interpreted quite differently. Market conditions can move swiftly in any direction and short-term shifts are impossible to predict with certainty. With this in mind, what is an investor to do?
 
The unthinkable happened on August 5th, 2011. U.S. debt obligations were downgraded by Standard & Poors (S & P), which is a respected corporate and government research and rating agency. In general, equity markets are clearly affected by a multitude of factors. However, the 6.7% retracement following the downgrade was largely attributable to their unconventional decision. This was enhanced by the inability and unwillingness of U.S. officials to find compromise on the debt challenges. Interestingly, S & P cited their lack of confidence in the U.S. government as the primary driver for the downgrade. Fitch and Moody's, which are two other research and ratings agencies, maintained their AAA ratings on U.S. debt. Their action offered the markets a bit of support. However, S & P's choice clearly proved to be a negative catalyst for the global markets and the appropriateness of their downgrade is being widely questioned. A positive byproduct of the downgrade is that the U.S. populace and their officials are keenly aware of the pressing fiscal challenges.

The Fixed Income and Credit Markets

Fixed income instruments or bonds have fared much better than equities during the same period. In fact, the ten-year Treasury bond yield was 2.14% as of August 10th, 2011, which is the lowest yield on record. Importantly, the current yield is still paltry when compared to historical standards and current dividend yields on many equities. Further, the "flight to quality" towards Treasury bonds appears counterintuitive considering the recent downgrade by S & P. Typically, bonds will sell off and their corresponding yields will increase following a downgrade. This speaks loudly to the fact that investors remain confident in U.S. debt instruments.
 
Interestingly, credit products, which include home mortgage loans, are tied to the ten-year Treasury bond. Consequently, mortgage rates have become very attractive but underwriting standards remain rigorous due to the continued strain on the financial system. Throughout the U.S., the residential and commercial real estate market has sustained a significant downward price adjustment. Although select areas are starting to recover, much of the U.S. residential real estate market remains distressed. According to Fiserv Case-Shiller, the U.S. will realize a year over year a decline of 3% during 2011.

Ben Bernanke, The Federal Reserve Chairman, has signaled that the Federal Reserve intends to keep interest rates at historic lows all the way to mid 2013. This is in an effort to stabilize the housing market and stimulate consumer spending. The threat of a global recession has caused oil prices to decline over the past few weeks. We view this as a near term positive for the stretched consumer. The long-term trend of U.S. dollar depreciation in relation to other currencies will likely be the path of least resistance. This could prove beneficial to U.S. exports. Of course, gold continues to hit new highs in light of its perceived safety and non-correlation to other investment alternatives. The "New Deal" and "Great Society" programs will likely be scaled back due to budget constraints. Likewise, we believe that tax increases and or tax reform will result from a new political reality. Corporate earnings have largely been favorable over the past couple of quarters but the employment situation continues be a concern. Despite historic government actions, the unemployment rate is 9.1% as reported by the Bureau of Labor Statistics.

European Debt Challenges

The credit-induced recession that began in the U.S. during 2008 has had reverberating effects in the Eurozone. Specifically, Greece, Ireland, Portugal, Spain and Italy's financial challenges are well documented. The European Central Bank (ECB) has provided assistance but uncertainties remain. We are encouraged by austerity measures taken by troubled governments and from the liquidity enhancement initiated through countries such as Germany and France. According to Eurostat, the unemployment rate in the European Union currently stands at 9.4%. Like the U.S., unemployment trends, access to capital and government budget deficits are problematic.

In conclusion, a handful of difficult issues have been amplified over the past few weeks. As noted, the European debt crisis and the U.S. downgrade have been the primary drivers of world equity market declines. If history is a guide, these issues will create long-term investment opportunities for patient investors who are well positioned.
 
The Cardinal Point Advantage

Our planning and investment process makes every effort to protect and grow principal during markets such as these. With this in mind, Cardinal Point has positioned our clients in the following manner:

1. We are not making dramatic portfolio adjustments. The S & P declined 6.7% on August 8th, 2011 while increasing 4.74% on August, 9th, 2011. Clearly, it is difficult to time the market during volatile periods.  All client portfolios have been designed for the long-term and are constructed to protect "downturn risk".
 
2. Short to intermediate fixed income maturity schedules are typically appropriate across risk profiles. We are advocating higher credit quality holdings in light of potential headwinds from the negative credit environment. We will seek to add credit and maturity risk when select opportunities present themselves.

3. Our investment philosophy dictates that clients invest in non-correlated asset classes. Portfolios are less subject to dramatic movements when assets are non-correlated. Some examples are gold and other commodities, REITs and foreign fixed income.

4. Clients have increased international diversification with regard to all asset classes to minimize portfolio exposure to the countries battling credit issues.

5. Clients have maximized their after-tax income streams in conjunction with their unique cash flow requirements. As noted, bond interest rates are low which is why we advocate the inclusion of dividend-paying equities.

6. Dollar cost averaging is utilized to mitigate "market timing" risk when clients commit additional funds to Cardinal Point's investment oversight.

7. Our process utilizes low cost investment vehicles and trading costs are kept to a minimum.

8. Cardinal Point uses strategic and tactical trading to limit exposure to falling asset classes.

9. Our process maintains that we focus on long-term goals, planning and financial objectives of our clients.

10. We monitor every client account daily to ensure performance remains strong through this tumultuous period.

Please contact Cardinal Point Wealth Management at http://www.cardinalpointwealth.com/US/contactus.html to review your unique situation.

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