The current "growth recession" may be the worst in 75 years and the third quarter was one of the worst in recent memory for equities worldwide. The Dow Jones Industrial Average fell by more than 12% in the quarter, the S & P 500 lost more than 14% and the total US stock market dropped nearly 16%. Moreover, the Dow Jones World Equity Index lost more than 20% during the period. All major equity indices performed decidedly negatively for the quarter resulting in a negative performance for all such indices for the year. Commodities also performed negatively for the nine-month period.

Not a single industry group finished in the black for the quarter and only two sectors, utilities (+ 7%) and health care (+ 1.5%), remain in positive territory ahead for the year thus far. Moreover, US mid-cap and small cap stocks fell between 14% and 15% for the nine-month period. Nor did diversification into alternative investments such as Master Limited Partnerships or commodities, except for alternative currencies (e.g. gold), provide a viable hedge.

As indicated, of the major US equity market groups, the strongest performers for 2011 thus far include utilities and health care, as well as consumer goods, while basic materials and financial issues lagged into extremely negative territory. The best performing subgroups included pipelines, water and electric utilities and pharmaceuticals, while the lowest ranking groups included, nonferrous metals and coal.

In the international equities markets, New Zealand produced a negative 1.5% return, which was the best country equity market performance for the period, as the Euro Zone lost nearly 22%, the Pacific region returned -17% and Latin America negative 28%. In Europe, Germany was down 22% for the period and within the Pacific zone, both the China and India markets lost 27% for the nine-month time frame.

Going forward, there is reason for optimism even though equity market performance is a leading indicator. The US economy is recovering very slowly, but fixed investment, production and wholesale and retail sales are showing improvement, while both durable, non-durable goods orders and factory orders in general have increased markedly from a year ago. Consumer confidence is down, however, probably due to the slow improvement in the employment picture and the political deadlock in Washington. And certainly, consumer confidence is one of the most important factors in moving economic growth forward.

Inflationary and deflationary forces appear to be in countervailing equilibrium given that there is still plenty of toxic debt to be digested while, on the other hand, the Federal Reserve is growing the M2 money supply at a 10% rate and is 'monetizing' the debt. As a result the rate of inflation has increased year-over-year to 3.8%. Nevertheless, optimism is wisely tempered by a conservative investment bias.

What is important on a roller coaster ride such as this is to "stay in one's seat". Selling positions in a portfolio or withdrawing from a portfolio at a rate that is greater than normal at this point in time would be very disadvantageous in the longer term because it would be selling at the most inopportune time. Although further downside market volatility is certainly possible, no one loses money until an asset is sold; until that time the loss is only on paper for a properly diversified portfolio. Although suffering paper losses can be a gut-wrenching experience, markets will inevitably rebound and diversified portfolios will regain their value, as they did after the 2008/09 meltdown. Moreover, the world's economy, as well as that of the US, is in much better shape than in the 2007/08 time frame and there is reason to believe that better times are ahead.

The US equity market has already "corrected" by 10%. A ten percent "correction" is defined by investment professionals as "normal" for the US equity markets that are "overvalued". However, the recent correction was from a market level that by almost no measure could be considered over-valued, except from the perspective of a rear view mirror. The correction was the result primarily of extraneous factors, especially by fear of European sovereign banking woes, and was generated in large part by large-scale market manipulators.

Moreover, other historically based market factors militate for a market recovery. These include the fact that: market sentiment is overextended on the downside, stocks are trading at below historical under-valuation trends and the S & P 500 dividend yield is higher than the 10 year treasury note. Finally, although the probability of the economy regressing into a recession has increased to 25%, according to some well regarded economists, there is still a three in four probability that we will muddle through and that economic growth will continue to be positive into 2012 and beyond. Therefore, it is our view that perhaps as early as the 4th quarter equity markets will begin to recoup their recent losses and will move into positive territory in 2012, given that corporate profitability continues to be quite robust and as it becomes clearer that the US economy is actually on the mend and that the Europeans can ultimately manage their banking woes.

Clearly, international manipulators, both individuals and institutions, can and do make money on the backs of individual investor’s fears. However, one must avoid falling prey to this strategy by being patient and by keeping the focus on the longer term. This has always been and will continue to be Wealth Conservancy's investment policy.