Although developed global economies remain generally sluggish, we are still of the opinion that the chances of a double dip recession or a deflationary environment are relatively low. Buoyed by strong corporate earnings and balance sheets, robust third quarter equity market returns reversed losses suffered in the second quarter and improved year to date returns. Reflective of the uneven nature of this recovery, the surge in equity prices occurred despite continued strong demand for bonds and gold which would generally be expected to ease in such an environment.

Investors continue to be risk adverse resulting in an unrelenting demand for bonds. This has resulted in corporations being able to raise record levels of cash, driving corporate debt default rates near pre-crisis lows and providing them with the liquidity needed to weather the current cycle as well as re-invest in their businesses. This is likely the main reason for employment statistics which improved during the quarter, albeit at a tepid rate. This lackluster improvement will hopefully persist until consumer attitudes and spending can step up. Even as households reduce their debt level, such consumer involvement will be critical as monetary and fiscal policy strategies have been primarily exhausted. This combination of slow growth and limited policy responses leaves financial markets pushing out the timeframe for both economic expansion and inflation.

The speed and duration of the global economic expansion will be the key variable to investment performance in the short to intermediate term. Although we remain guardedly optimistic that improvement should continue on a sporadic and gradual basis, investment policy should concede the many unknown factors which will have an impact on investment performance. For this reason, we continue to suggest a policy that allocates your investment assets based on the envisioned timing of required withdrawals from the portfolio. Short to intermediate requirements should be reflected by cash and fixed income exposure, and longer term holding reflected in a portfolio of diversified equities.

As the table below illustrates, equity market returns recovered strongly across the board for the previous quarter bolstering the full year statistics.