Is It Safe To Go Back In The Water?
Our Second Quarter Outlook, 2009

By: Phil Guerrero, CFP®. PMG Wealth Management
April 1, 2009

You may have heard me describe my opinion of the market being “in the soup” for the first quarter. In my last quarterly letter I described how the first quarter will be the large part of the “bottoming process”. After the issues we faced in the fall we expected the news, media blitz, bad earnings, and possible pain to be near its peak in the first quarter and then possibly turning or flattening out for the better in the second quarter. Much of this has occurred, just a bit sooner than expected.

Despite the strong rebound in March we do need to remain conservative. Many traders and investors will want to re-test the low points from February. With much of the rear view mirror 1st quarter economic news likely to be negative, it makes a re-test of the bottom a strong possibility. This re-test will be temporary as the market continues to look forward with other earnings and housing news improving.

Are we off life support? Yes, but we’ve moved to government support. It’s easy to be negative with this scenario due to the large amounts of spending, hearings, regulation, and finger pointing. The key for an investor to remember is this: So much money has been flooded into the system that eventually it will flow to where it needs to go (business owners, home owners, tax payers).

Is it safe to go back in the water? Yes, but in phases. Clients across the board have more cash than we’ve ever had in the past and their investments have moved down the risk ladder as well. At some point we need to begin to get back into the water and back up the risk ladder. People still have long-term goals regardless of what is going on in the economy. Interest rates will remain low with the government trying to encourage consumer spending, lending, home purchases, and overall growth.
Will all this spending add up to future inflation? Yes, most likely in the form of higher gas prices and other commodity prices down the road. Interest rates and CPI will remain low for a couple of years to stimulate growth with the government playing a part. Inflation is not an immediate concern for investors.

What is the strategy for the next three months? Our strategy is to remain conservative with a balanced investment approach. Our tactical portfolios are already about half stock, half bonds and cash. The bond market currently has almost as much opportunity as the equity markets do, with less risk. This is a logical first step for those who raised cash or have held cash the last few months.

We will have our chances to take on more risk towards the end of the year with more stability behind us. Portfolios in this market should focus on income from bonds, dividends from equities or funds, and mostly a balanced, diversified approach. If the market does re-test the February lows we can feel a bit more comfortable adding to equity positions along the way.

Lastly, please re-visit your emergency savings and household budget. The foundation to any financial plan begins here. If these two are good, odds are strongly in your favor of outlasting any bad economy or financial stress in the future.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.