Q3 2010 Economic and Market Review

U.S. equity markets experienced a strong uplift during the third quarter, with the S&P returning 11.29%, bringing year-to-date results into positive territory at 3.89% through September. Notably, the Dow Jones Industrial Average added 7.85% for the final month of the quarter, achieving its best September performance since 1939.(1)  Across the globe, from Europe to China, third quarter results were similarly robust. These sizeable gains followed a volatile second quarter that delivered decidedly negative returns. However, the sharply rising third quarter stock market stands in contrast to the steady stream of economic data, which on balance indicate that the recovery continues to be painfully slow, particularly in developed markets. This quarter we will highlight the U.S. economy, as well as compare the current uncertain economic direction in the U.S. to the pattern of steady growth in China.

Recovery or Recession?

Discussion continues about future prospects for the U. S. economy, with unemployment stuck at levels well exceeding 9%, tepid consumer spending, and only very modest growth levels in GDP. There is currently no clear answer in the data about whether the economy will again fall into recession or accelerate in the direction of recovery. Many analysts believe renewed recession to be unlikely, pointing to growing business spending as a bright spot. And others point to the lack of recovery in consumer spending—fueled by stubbornly high levels of unemployment and underemployment—as key, given that consumer spending makes up the lion's share of economic activity in the U.S.
This ultra-slow growth holding pattern has persisted for enough time that many commentators and analysts now expect the Federal Reserve to step in to pump more money into the U.S. economy in an attempt to stimulate growth and avert a dangerous downslide in prices. Just one day after quarter end, the dollar fell to a six-month low relative to the euro, furthering speculation about government action. With the federal funds rate standing close to zero, conventional monetary easing has not been an option for some time. The Fed stated in September that they expect inflation to remain low
and some Fed leaders have spoken openly about the risks of deflation. However, it is unclear whether they will continue with small steps, or if they will take bolder action. And the outcome of any action (or lack thereof) is unknown.

Growth in China

There is no lack of clarity about economic growth in China. While U.S. manufacturing slowed in September to its lowest rate in 10 months, China's manufacturing increased in September to its fastest pace in four months.(2)  U.S. GDP now significantly trails global GDP, and the World Bank reports that 'developing countries have come to the global economy's rescue,' and that 'they are the new locomotives of growth.'(3)  China continues to outpace its competitors, surpassing the Japanese economy during the second quarter and aiming to secure second place in the world economy for the year as a whole. In terms of purchasing power, China supplanted Japan nearly a decade ago and now stands behind only the U.S. and the European Union.(4) China passed the U.S. to become Brazil's largest trading partner in 2009 and is also likely to emerge as the biggest direct investor in Brazil this year—part of a long-term trend of economic development of collaboration between China and the rest of the developing world. One purpose of these investments may be to stimulate external demand for Chinese goods, given the limited purchasing power of the Chinese consumer.(5) This weak internal market, and a desire to reduce dependence on the U.S. import market, may also motivate China's increase in trade with Europe.

Looking Ahead

As we head into the final quarter of 2010, uncertainty continues to prevail, with many analysts focusing on the U.S. and China to gauge the health of the global economy. Currently, China is moving on an upward economic trajectory, but it is less clear whether the U.S. and other developed countries will follow that course. While the U.S. recovery has been sluggish to date, opinion is divided about what the economic future holds and whether government intervention is likely to help or hurt. And it remains to be seen whether China's export diversification and investment in worldwide development could shield the Chinese economy, and perhaps limit the global damage, if the U.S. were to sink back into recession. Likewise, viewpoints are split about the stock market's recovery, with some believing that we are at the beginning of a cyclical bull market and others expecting bad economic news to unleash the bears again. Given the multiple levels of uncertainty, many investors are preparing for a range of scenarios, including inflation, deflation, stagnation and growth.

As always, I'm here to oversee your portfolio and always available to discuss any changes to your goals or objectives, as well as to answer any questions you may have.

Best Always,

Bob

Robert O'Braitis
President
Chief Financial Strategist
Lansdowne Private Wealth Management
703-724-9499
Bob@LPWMGROUP.com


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(1) Steven Russolillo and Kristina Peterson, 'Dow Higher, but Mood Is Cautious,' The Wall Street Journal,
October 1, 2010, http://online.wsj.com.
(2) Bob Willis, 'ISM U.S. Manufacturing Index Decreased to 54.4 in September,' Bloomberg, October 1,
2010, http://wwwbloomberg.com.
(3) Sandrine Rastello, 'Emerging Economies to Outgrow Developed Nations by 2015, World Bank Says,'
Bloomberg, September 27, 2010, http://www.bloomberg.com.
(4) Lindsay Whipp and Jamil Anderlini, 'Chinese economy eclipses Japan's,' Financial Times, August 16,
2010, http://www.ft.com.
(5) Geoff Dyer, 'World economy: The China cycle,' Financial Times, September 12, 2010,
http://www.ft.com.

This information has been obtained from an outside source and is provided by Robert O'Braitis. Robert O'Braitis, AXA Advisors and AXA Network do not guarantee or accept liability for its accuracy. This information should not be constructed as investment advice. All economic and performance data is historical and is not indicative of future results. Diversification strategies do not guarantee a profit or protection against loss in a declining market.
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