The U.S. stock market has overcome numerous fear inducing events to climb up out of the depths of the 2008–09 global financial crisis to new all-time highs on the S&P 500 Index. This is consistent with the fact that historically stocks have done quite well in the face of investor pessimism and concerns, leading to the saying that stocks tend to climb a “wall of worry”. In Europe, countries in the periphery are backing off of some austerity measures in favor of growth and the European Central Bank cut rates in early May to help fuel expansion. Both moves have given way for a market rally in Europe. In the U.S., investors have reacted positively of late to some better data points from housing and the labor markets. Earlier this year, we wrote of the importance of being prepared for a period of renewed market volatility. However, the past few months have witnessed stress measures like the VIX move lower and lower. This month’s Feature Article explores just how high the “wall of worry” is today, both at home and abroad, as well as the cracks that are forming in this wall. Feature Article >>, U.S. Economic Overview >>, Global Economic Overview >>

The first four months of 2013 delivered a full year’s worth of returns to U.S. equity investors based on where our indicators stood at the end of December. As a result of this and what we perceived to be increased investor complacency, we have reduced our recommended developed international equity exposure somewhat (though we remain overweight), as well as our U.S. Large Cap stock exposure (to a modest underweight position). Equity markets in the developed world (especially in the U.S.) have become less attractive as the market rally has continued, our Economic Clock has progressed to 8:15, and many of our economic indicators are signaling that we are well past the ideal time to overweight stocks. It is important to note that the weight of the evidence from our indicators still suggests that the risk of a sustained loss in stocks remains modest. However, they also signal that we are past the ideal point in the cycle to be overweight equities. On the fixed income side, we remain significantly underweight U.S. Treasury securities and significantly overweight corporate bonds. Top-Down Asset Allocation Recommendations >>, Economic Clock >>

In this newsletter, we have two Countries in Focus pieces, the United Kingdom and Brazil. The United Kingdom possesses a strong democratic tradition, pro-market economic policy, and much openness to foreign trade and investment. However, underinvestment in public infrastructure, a labor force with low relative productivity growth, and a financial system that still remains constrained from the aftermath of the global economic crisis with one of the largest structural budget deficits in the OECD are clear disadvantages for the country. The country’s austerity program has grown increasingly unpopular, while its inability to cut the deficit has caused the country to lose its AAA credit rating. They have reduced their policy rate and implemented quantitative easing in an effort to curb the shrinking economy and the suffering labor market. The stock market is large, deep and very liquid and well exposed to global growth, making for some attractive investment opportunities in leading globally competitive companies despite the economic conditions inside the country. Country in Focus: United Kingdom >>

Brazil has a strong demographic profile and a population with growing incomes. However, the country has suffered from a poor education system, a high cost of doing business, extensive state presence, and a relatively closed economy which needs to be changed in order to alleviate supply-side bottle-necks and inflationary pressures. While some slowing recently has been felt in the Brazilian economy, the deceleration in the pace of economic growth since 2010 has thus far not had a significant impact on the overall labor market and consumption dynamics. While the Brazilian economy possesses many inherent advantages and secular tailwinds, the growth record since 2010 makes it clear that there are certainly numerous near-term challenges for Brazil to overcome in order to return to growth rates seen in the first decade of the 2000s. However, in recent years Brazil has backtracked on measures necessary to return to these growth rates, creating concern about the direction the economy will take in the future. From our viewpoint, this dynamic is likely to act as a lid on valuations until there are signs that policymakers are once again moving in the right direction. Country in Focus: Brazil >>