The jury remains out with regard to the duration and severity of the slowdown that is apparent in the U.S. economy. There are four identifiable pressures on the domestic consumer which may likely have a bearing on the performance of the economy for the near term. The first is the impact of adjustable mortgages that are resetting to the higher side. Second, would be the tighter lending standards resulting from the most recent crisis in the sub prime mortgage lending market. Third, is decreasing home equity wealth as a result of weakening residential real estate prices. Lastly, solid increases in energy and other commodity prices would seem likely to curtail domestic discretionary spending capacity.

The above factors, which have been dubbed a perfect storm for consumers by some economists, do not paint a robust outlook for growth in the near term. However, in light of what has been experienced to this point, one may legitimately question why this has not pervaded the general economy in a more significant fashion. Although strong corporate profit growth may not be expected in such an environment, those earnings have been tempered by strong overseas results.

The global economy continues to fare quite well in spite of the downshift seen in the United States. The continuation of this phenomenon would be unusual from a historical perspective. Generally, a rentrenchment by the U.S. consumer will significantly drain many of the international economies which feed its consumption. This is easy to comprehend in markets such as China, India and Mexico, but also pertains to more developed markets such as Japan. However, it is not clear whether the fundamentally real estate based contraction in the U.S. will translate directly to significantly weaker consumer spending. If it does, the world markets will likely decline with the U.S. However, if the consumer can squeak by as they have adeptly done so to this point, international markets may continue to remain strong.

Even when issues discussed above seem fairly clear, it is still difficult to translate those into definitive portfolio strategies. Instead, the policy we suggest for our clients concede that such factors are impossible to predict with sufficient accuracy, to make reliable portfolio changes. Instead, only time and diversification will adequately mitigate the risks inherent in financial markets operating within the ongoing uncertainty of these factors. For this reason, the policy we suggest for our clients portfolios is that only funds necessary for the longer term are to be directed to growth, while funds needed in the nearer term are better directed to cash and fixed income exposure.

Equity Markets

Except for the large capitalization market of the U.S., most other domestic and international equity markets provided reasonable returns for the first quarter of this year. This resulted in decent returns for U.S. mid and small-cap equity indices for the previous twelve months and very strong results for international averages for the same period. For all the discussion of weak U.S. real estate markets, this sector recovered from recent quarters and reflects the strongest full-year return.

The table immediately below reflects the quarterly and annual returns seen in benchmark sectors with our model growth component.