Our Quarterly Commentary
Information on this site is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.

Tarpley & Underwood Financial Advisors, LLCSecond Quarter 2009
There are other economic concerns that will influence how the environment unfolds in the years ahead. One of these is housing, which started the cycle of damage we are now in. There have recently been a few positive signs including stronger demand and historically high levels of affordability.
Another question is whether we should be worried about inflation or deflation. At present, there is an enormous amount of excess manufacturing capacity and available labor so it is unlikely there will be higher costs to pass along. Demand-driven inflation is also unlikely. Over the intermediate-term there is even some concern that deflation could take hold if the global economy doesn’t experience a sustained rebound. However, looking out a few years, the bigger risk is that policy makers’ efforts to avoid a deflationary cycle are too successful and trigger a run up in the inflation rate to modestly high levels or worse.

Government intervention probably saved us from an economic depression, but have we dodged the only bullet? Given the actions to date, the Fed and the Treasury are clearly committed to doing whatever it takes to help the economy find a floor so that it can grow again. On the other hand, if there are no more bullets to dodge, it will be difficult to know when the timing is right to taper the stimulus. If it is decreased too early the economy could relapse (as happened in the U.S. in the 1930s and Japan in the 1990s) and if it is extended too long it will add to budgetary woes. In any event, there will be great political pressure to deal with on both sides of the issue. 

Investment returns will also be influenced by in-vestors’ willingness to take on risk, which tends to build during bull markets and break down in bear markets. The degree of investor risk aversion is an unknown that will impact returns in the years ahead. Our working assumption is that it is more likely than not that higher-than-normal risk aver-sion will subside very gradually and that stock P/E multiples in five years will be average or below average relative to the last 50 years. If we look beyond five years we can anticipate a gradual return of normal risk-taking leading to higher returns.

We Consider a Range of Outcomes in Making Portfolio Decisions

Broadly speaking, these conflicts create a very wide range of possible outcomes.
But a wave of new supply from foreclosures over the next two years suggests the market will continue to struggle. (There are more than a trillion dollars in adjustable mortgages that are underwater and that have yet to reset to higher payments, and high unemployment will make things worse.)