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Moderating Growth, More Volatility

The recent correction of 10-15% in major stock market indexes was ignited by concerns over sovereign debt markets in Europe, but it is also a reflection of moderating growth rate in our economy. The rapid rebound from our recession lows is over, and we expect moderating economic and earnings growth in the months ahead. We view the possibility of a “double-dip” recession as unlikely, and Fed Chairman Ben Bernanke as well as most economists share this view. However, there are plenty of “perma-bears” and “gold bugs” on the airwaves that would like you to believe otherwise. We suggest turning them off and enjoying the summer!

We have used this volatility to do some portfolio re-balancing and position portfolios for what we believe will be a moderate but more durable expansion in the years ahead. We have filled out our small cap exposures in both our domestic and foreign allocations, while trimming our foreign funds with the highest exposure to Europe. We have also done some normal trimming of our bond positions in anticipation of adding some attractive tactical positions in the months ahead.

Before we add more tactical positions we will wait to see more signs of strength in the economy, particularly in the jobs and housing markets, where improvement has been uneven. The good news is that inflation and interest rates look to remain low for some time – both key positives for the stock market for the rest of the year.

Have a great day!

Bob

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