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Economic Recovery Will Be Subpar

Numerous issues persist in providing downside risk to our forecast, with the most serious at the moment being the sovereign debt situation in Europe.

"A man's got to know his limitations."
- Clint Eastwood as "Dirty" Harry Callahan in the movie Magnum Force



) -- Recent market movement -- with the increase in volatility and more than 10% decline from the recent peak in the

S&P 500

-- has certainly reminded investors of the risk that accompanies the best performing asset class over time.

Though investors may feel like they are walking a tightrope in the markets at the moment, using history as our guide (and as we have noted in previous commentaries), we believed it was merely a matter of time before the market suffered at least a 10% correction, particularly after 14 months and a trough-to-peak increase of more than 80%. Strategas Research Partners looked at the 11 S&P 500 bull markets since 1942 and observed the following.

The majority of these bull markets (64%) suffered a correction of 10% or more in the first 24 months.

None suffered a 10% correction in both the first and second 12-month periods, which is consistent with the current bull market.

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The average bull market since 1942 has lasted 57 months and returned 164%.

In and of itself, the current correction in stock prices is not yet evidence that this bull market is at its end.

Numerous issues persist in providing downside risk to our forecast, with the most serious at the moment being the sovereign debt situation in Europe. While these problems have the possibility of derailing the recovery, we don't believe they will. Though our economic outlook continues to favor the view that the economic recovery is sustainable, we believe it will be subpar. However, we believe global economic recovery should continue to provide a supportive backdrop for stocks and other risk assets.

Those waiting for the perfect market environment to invest are likely to be disappointed on multiple fronts.

First, there is rarely a time throughout history in which there was not some concern in the marketplace.

Next, the stock market tends to move in advance of the fundamental data.

Last, it is precisely in the market environment when all seems perfect that one should be most worried. Typically, investors pay a high price for universally cheery news.

With the return to volatility, we recommend that investors know their limitations and neither stretch risk allocation by reaching for a few dollars more nor completely remove stock risk from portfolios. The worst course for investors is to be continually buffeted by short-term volatility, which typically leads to buying high and selling low when the pain becomes too great. Our recommendation is to find the long-term asset allocation in which an investor can maintain income needs and liquidity while surviving the nastiest of the expected short-term downturns, at the same time focusing on the long-term goal of growing purchasing power and being comforted by the historical longer-term returns and risks.

Bill Stone is the Chief Investment Strategist for PNC Wealth Management and PNC Institutional Investments with over $100 billion in assets under management. He is a member of PNC's Investment Policy Committee and is responsible for defining the asset allocations and portfolio strategies used throughout the organization to advise individual and institutional investors. Stone is a cum laude and honor's program graduate of the University of Dayton with a bachelor's degree in finance. He earned a master's of business administration from the Katz Graduate School of Business at the University of Pittsburgh. In addition, he holds the Chartered Financial Analyst? designation and is a Chartered Market Technician. Stone has been quoted in many publications including The Wall Street Journal, Financial Times, Barron's, Fortune, Forbes and USA Today. He is regularly interviewed by Associated Press and Reuters. He is also regularly interviewed on CNBC and Fox Business for his market insights.