I’m a huge bull on this country… we won’t have a double dip recession. I see our businesses coming back almost across the board…

Warren Buffett, September 13, 2010

I’m writing to share some thoughts on today’s economic outlook, looking beyond the headlines and to bring you up to speed on stock markets.

First a short summary of stock market performance in 2010 to date. Markets in the last three months saw a continuation of the roller-coaster like turbulence of the past couple of years.

After a strong first quarter and a big pullback in the second quarter, July saw a solid recovery in global markets.

This was followed by weak performance in August, and September (historically a troublesome month for markets) saw a big bounce back (the U.S. market experienced the best September since 1939). As a whole, global markets were up 9% for the third quarter and are up 2% in 2010 to date.

Here’s how markets have performed in the last quarter and so far this year:

Source: MCSI index. All returns are in local currency.

The importance of a balanced perspective

One of the keys to success for investors is maintaining emotional equilibrium, preventing the highs from being too high and the lows from being too low.

Today, many Canadians are pessimistic about the American and global economies driven by daunting headlines about slow economic growth, depressed housing prices, high unemployment and deficit problems in the U.S. and Europe. This pessimism is amplified by the media coverage given to voices of gloom such as Nouriel Roubini and David Rosenberg.

As a result, it’s easy to miss some of the good news beyond the headlines.

The Big Sky Conference: Looking past short term issues

That’s why a conference that took place in mid September is important, as it provided some offsetting perspective on the mid and long term positives for the United States and globally.

Speaking to 2000 business and political leaders at “The Big Sky Conference” in Montana, here are comments from Warren Buffett, Steve Ballmer of Microsoft and GE’s Jeff Immelt.

Warren Buffett:

“I’m a huge bull on this country… we won’t have a double dip recession. I see our businesses coming back almost across the board… it’s night and day from a year ago.”

“I’ve seen sentiment turn sour in the last three months or so, generally in the media. I don’t see that in our businesses. I see we’re employing more people than a month ago, two months ago.”

“The things that worked for the country through a century of two world wars, a depression and more – all while increasing the standard of living – will work again.”

Steve Ballmer, Microsoft:

“There soon will be more technological advancement and invention than there was during the Internet era and that will help drive business growth.”

“I am very enthusiastic what the future holds for our industry and what our industry will mean for growth in other industries.”

“We will see new technologies that move beyond the Internet to tie together computers, phones, televisions and data centers to create amazing new products. And the pace of innovation will increase as technology makes workers more productive.”

Jeff Immelt, GE:

“Angry political rhetoric is not helpful and headlines are too focused on finding negative indicators.”

“Business at GE is improving. Signs across the world show growth improving as evidenced by a rise in GE’s orders.”

“GE is now finding it profitable to build manufacturing and service centers in the United States rather than overseas, because it is more competitive to do so.”

The path ahead

Of note, these positive views are supported by recent research from McKinsey & Company, a leading strategy consulting firm. McKinsey surveyed 2000 executives around the world in early September:

• Almost 60% said their country’s economy is in recovery.
• Most expect profits to rise from last year.
• And nearly 40% expect to hire employees by the end of 2010.

It’s not realistic to suggest there won’t be challenges ahead, both for global economies and for stock markets. Overall, we remain positive on the long-term outlook for the equity market. Concerns about the economy have caused many investors to make large allocations to cash and bonds. If you are in that category, I believe now is a good time to reexamine your strategy.

As always, should you have any questions on this post or any other matter, my team and I are always happy to take your calls.

More information on the Montana conference:

Buffett Rules Out Double-Dip Recession Amid Growth: http://www.bloomberg.com/news/2010-09-13/buffett-rules-out-double-dip-u-s-recession-says-berkshire-units-growing.html

Buffett, Ballmer predict bright economic future: http://news.yahoo.com/s/ap/20100913/ap_on_bi_ge/us_economy_leaders

Excerpt from London Capital Management‘s Monthly Investment Commentary for March 2009:

As Inevitable As Spring Following Winter

The market declines and extreme volatility have tested the mettle of even the most battle-hardened investors, and the headlines continue to trumpet only the most depressing of news. This has left many investors asking ‘when is it going to end?’, or in other words, ‘when are we going to see the market bottom’?

The bottoming process is the stage at which markets have hit their lowest point and the start of a market recovery can begin. Sometimes these are marked by a quick, sustained recovery and other times (as it appears now) it can take months of equity markets trading within a range and retesting lows before markets find the bottom.

Markets find their bottom not when investors feel excited about a potential bull market to follow, but rather when they feel worry, doubt and concern about the situation at hand. In other words, market bottoms feel terrible! And despite historical evidence that equity markets are more likely to rise and have above average returns over the next five to ten years after a weak period, fear causes many investors to not take full advantage of these upswings.

We cannot predict the exact timing that will mark the absolute end to the recent market declines, but experience tells us it is most likely to happen when investors feel their worst – and right now, we know investor sentiment is at multi-year lows. We also know that at some point the tides will turn and markets will start to recover – it’s as inevitable as spring following winter. The question is, how will you be invested when that change happens?

Photo credit: “winter grass” by D’Arcy Norman