Economic Outlook

Growth Likely Moderate While Avoiding Deflation

The U.S. economic recovery has downshifted into a lower gear. The Great Recession was declared over, but domestic growth is trending on only a moderate growth path. Positives abound: inflation remains subdued; capital spending, manufacturing, and auto production are doing very well; and the prospect of a double dip is moderate. However, housing is only now showing signs of life, fiscal budget deficits are a continuing concern and volatility should remain high.

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Equity Portfolios

Through The Volatility, Equities Continue To Offer Value

The equity market remains priced at a discount to levels suggested by NIA (National Income Accounts) earnings. Of course, we believe the discount gap between current price and earnings will fluctuate with changes in the level of earnings and stock prices. But investing in equities when this size of a discount exists creates a margin of safety as the market remains volatile. Further, we believe the level of interest rates will also have an impact on “fair” value, through changes in the P/E. Recent drops in the level of market interest rates, all else being equal, also tend to support stock prices

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Fixed Income Portfolios

Bonds Post Gains As Demand Continues

The bond market continues to be impacted by investors’ concern with the worldwide economic recovery. And while many claim the bond market is priced in a bubble, our analysis suggests that is a mis-characterization. Given the current level of inflation, and monetary policy, we believe yield levels are far from extreme, even if they are at lows not seen for many years.

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