This is our first entry in a little over a week.  We’re usually pretty busy with quarter and year end reporting activities, but a travel commitment late last week made things a bit tighter than usual.  As the dust begins to settle, we’ll certainly be back on schedule, blogging on a more regular basis.  If you missed the 2007 performance review we sent last week, you can read it here.  Suffice it to say, we had a great year, but also know that this is a a marathon and not a sprint.   

The markets have been a train wreck so far this year.  Last Friday’s higher than expected unemployment report stoked fears that we are already in or soon to be in a recession.  We have expected unemployment to increase given the troubled housing and credit markets, but even we were a bit surprised by the magnitude of the increase…from 4.7% to 5.0%.  With Citigroup rumored to layoff over 30,000 of its employees soon – roughly 10% of their total – it is hard to imagine that the rate won’t climb higher.

Last week we were in Florida where many new roads and buildings are being constructed.  In almost every case, the windows are hurricane proof, designed to withstand 120 mile per hour winds without breaking.  Traffic signals don’t dangle from wires as you typically see in the midwest, but are embedded into large poles that span the entire road.  Our bias towards growth stocks has been predicated on the view that the economy successfully bends without breaking.  Growth stocks are usually driven by factors beyond just the direction of the economy and as such, usually begin to sell at a premium as economic growth slows.  The economic winds were whipped into a frenzy by last week’s unemployment news and while we’re still of the view that the windows to growth will hold steady, the noise is nevertheless unsettling for investors.

Growth stocks have been hit the hardest in the last few days as our economic thesis of bending without breaking has been tested.  Yesterday, the S&P 500 quickly bounced off the downside support levels we saw in both August and November.  The market’s classic defensive sectors have done the best, including utilities, health care, and consumer staples, while 2007’s leadership sectors, industrials and technology, got hit the hardest.

The markets won’t likely break below these support levels unless the economy is, in fact, in a recession.   The Fed will continue to cut rates.  Slowing domestic growth should have a braking effect on global growth rates, reducing inflationary pressures and the current fears over stagflation.  We’re not writing early 2008 off, but with the macroeconomic data taking an additional leg down, we’re not dancing in the streets either.  Earnings season is fast approaching and guidance will likely prove conservative.  

Taking the longer view, a recession, even if there is one, should be relatively short lived.  While everything would get ugly for a quarter or two, the bulk of the clean up activities will likely reside where the greatest excesses occurred, similar to what happened with technology earlier in this decade.