Thursday’s Flash Crash and Europe

Last week was a hectic week in the stock market. On Thursday we witnessed a rollercoaster as stocks started strong, fell as fears increased that the sovereign debt crisis in Greece might spread to other areas of Europe. Shortly thereafter we saw the Dow fall almost 10% in just a fraction of an hour, and then just as quickly recover by 7%. It briefly felt like the market environment of October 2008 all over again. But this is not a repeat of 2008, and both the economy and the markets have vastly improved since then. Bond and credit markets are functioning again, corporations are once again showing healthy profits, and the Fed appears committed to keeping interest rates low until both the housing and jobs markets heal. We are seeing tentative signs of both!

As for problems in Europe, we feel the Euro nations almost $1 trillion in loan and guaranty support for its member nations will stabilize the region, and limit the risk of their problems becoming our problem-or Asia’s problem. As a result of this massive debt, we believe that there will be slower growth in that region of the world for quite some time.

We have been expecting volatility to return to the markets and we will continue to monitor the daily volumes in order to take advantage by making some changes to the portfolios in the coming weeks. We will be reducing our allocation to investments with exposure in the European region, filling out our investments in U.S. stocks where the economy is improving, and adjusting our allocations in the emerging markets increasing exposure to the specific areas where we see the best opportunities. Our bond portfolios will remain diversified and focus on areas that provide better yield than treasuries and limit our risk when the Fed eventually begins raising rates.

Volatility is back but we plan to use it to your advantage!