Stock markets around the world have rallied strong from their March lows, retracing about one-half of their losses. While this is better than the alternative, it is also very typical of a bear market rally, so it does not necessarily mean we’re out of the woods.

One year ago, the most adamant bears were predicting the S&P would sink to 1,000 and it dipped into the 600’s. Six months ago, the most adamant bulls were predicting a rally to 1,000, and now we’re there! Just as it overshot on the downside, it may overshoot to the upside, with the reasonable answer somewhere in between.

Looking in the rear-view mirror, let’s assume first that the March lows were too low and merely the final panic sell-off created by the economic meltdown last year, and second that the market is now fairly priced for our current economic circumstances. If this is the case, then the market will only make progress from here if our economy makes true progress going forward. However, since our economy is at the epicenter of the world’s troubles, it has many more economic issues to work through before solid results are consistently achieved.

Thus we are also looking elsewhere for opportunities. While other stock markets around the world sold off along with us during the panic stages, they do not face our troubles going forward and may offer better returns. Economies such as India, Brazil and Turkey to name a few, are experiencing internal growth and favorable economic and demographic trends that will allow them to prosper even as America suffers through some tough times. We expect to add incremental exposure to such overseas markets as their conditions continue to improve.

Overall, we would continue to characterize our outlook not as optimistic or pessimistic, but merely opportunistic. Our economy is in uncharted territory. While we hope for the good times to return, we must be ready for some difficult times as well and try to take advantage of what develops along the way. Thus far, our theme of getting paid (i.e. owning more bonds than usual) while we wait for the recovery is working quite nicely, and we do not expect substantial changes in the near term. In fact, several bond market indices have more than doubled the stock market indices this year.

We continue to monitor the economic landscape to assess a prudent path through these difficult times.