Q1 Market Commentary & Outlook
by Chris Brown, Chief Investment Officer, as of March 31, 2009
Although most of the major indexes closed the quarter in negative territory, a March rally helped the stock market end the period on a more positive note. Investors continue to be skeptical as to whether this is merely a bear market rally or the beginning of the long-awaited recovery. The portfolio managers at Pax World have discussed each of these scenarios. It’s important to keep in mind that the stock market is a discounting mechanism, typically adjusting for future economic changes. Historically, under normal conditions, the market has adjusted for economic change six- to nine-months in advance. While there is nothing normal about this economic environment, we feel a bottoming phase may be taking place in the stock market. Housing has led us into this recession and we believe it will lead us out of it. The Federal Reserve (Fed) has made it clear that it will rigorously use its balance sheet to free up the credit markets, which already has resulted in very low mortgage rates. We believe the Fed’s actions have set the stage for a bottom in housing starts and sales by summer and hopefully a bottom in home prices by early 2010. Although many economic indicators remain negative, the market appears to be shrugging off a lot of the bad news. In the past, this has been another indicator of a market bottom.
We are certainly not “out of the woods” with respect to the economy, but we do believe stocks are continuing to discount much of the negative economic data, both current and future. Many of our portfolios have been slowly shifting to take advantage of this phase of the market, increasing our exposure in anticipation of a gradual economic recovery. Fixed income continues to be a source of opportunity for our Balanced Fund and High Yield Bond Fund as spreads on both investment grade and high-yield corporate issues are generally at all-time highs versus Treasuries. We still believe default rates will climb; however, yields have discounted much of this increase.
Overall, we remain cautiously optimistic, believing the economy will begin to gain traction in late 2009 to early 2010. We continue to look for quality names that have been unfairly punished or oversold relative to peers, as we believe they will likely be the prime beneficiaries of a global economic recovery.
By investing in high yield bonds you may be subjected to greater price volatility based on fluctuations in issuer and credit quality. When investing in bonds, you are subject, but not limited to, the same interest rate, inflation and credit risks associated with the underlying bonds owned by the Fund.
Past performance does not guarantee future results.
PAX000381 (7/09)