Gradual Recovery to Continue

The U.S. equity markets have had a remarkable recovery from the worst market decline in the last 70 years. This was a painful period and some of the legacy issues in the aftermath of the recession include very high unemployment, credit constraints, fears of a possible collapse of the U.S. banking system, concerns about U.S. government budget deficits and exploding national debt. While the S&P 500 is still 21.5% below the October 9, 2007 intra-day high, it has recovered much of the lost ground from late 2007 through early March 2009.

For the first time, the new Congress is starting to seriously discuss budget steps to reduce Federal spending and to assess what if any changes need to be made to the tax code. Reductions in Federal spending will be necessary to address the continuing large budget deficits and the still rapid growth in the Federal debt (now up to in excess of $13.5 trillion). Unfortunately, the Federal debt is still growing much faster than the rate of U.S. GDP growth.

The outlook for 2011 GDP growth is for economic strengthening (after approximately 2.5% growth in 2010) but economists’ GDP growth predictions for next year range from 2.5% to 3.5%.

• The good news is that the economic recovery is expected to continue in 2011, as positive momentum in consumer spending and business fixed investment battles continued headwinds.

• The bad news is that the recovery is unlikely to be strong enough to push the unemployment rate down by much.

• The risks to growth are still tilted predominately to the downside, but monetary policy will remain supportive.

Recessions that are caused by financial crises tend to be much more severe and the recoveries take a lot longer. This was the worst financial crisis since the Great Depression (and is some ways, the financial strains were more severe).

The federal fiscal stimulus will decrease in 2011, effectively acting like a drag on overall GDP growth. Short term interest rates are unlikely to start rising until 2012. Long term interest rates normally rise with economic growth, but they should not rise so rapidly that the recovery is threatened.

The current market increase has been one of the longest in the last 40 years. However, that increase is measured from the extreme market low in October of 2008.

The recent increase in equities leaves us very cautious in the short term. We are more optimistic for equity markets improving along with the economy as the year progresses.

We continue to believe the management of risk to be more prudent than the management of returns.

Sincerely,

Larry Cavalena
Registered Principal

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Opinions expressed here are Larry Cavalena’s not necessarily those of Raymond James Financial Services or any of Raymond James affiliates. Expressions of opinion are as of this date and are subject to change without notice.

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.

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