The recent volatility in the stock market has received extensive coverage in the press. We wanted to send this interim communication to give our clients and friends in the community an update on our current thinking.

We are becoming more optimistic about the prospects for the stock market, and here’s why.

During the past week there was a palpable sense of panic in the financial markets. These panics often occur near turning points in the direction of share prices.

By definition, market bottoms occur at the point of maximum pessimism. Unfortunately we cannot pinpoint those inflection points until we have the benefit of 20-20 hindsight. Nevertheless, the panic selling last Tuesday and Wednesday seemed like episodes of indiscriminate selling.

In response to severe declines in overseas markets and the prospect of financial panic in the U.S., the Federal Reserve slashed interest rates by ¾ of a percentage point. The Fed’s action was extraordinary for at least two reasons. First, the action occurred less than two weeks before the central bank’s regularly scheduled meeting. Second, the last time the Fed cut rates by that amount was in 1984. We interpret the Fed’s actions as tangible evidence that it will not allow the economy to fall off a cliff.

The economic news has not been good. However, investors should remember that the current data is not so important as future expectations. Looking forward six to twelve months, the Fed actions, supported by fiscal stimulus, will likely have a positive effect on economic activity.

Markets rarely move in a straight line and we are likely to see the stock market engage in some backing and filling over the next few months. While there are never guarantees in this business, we think the current monetary and fiscal policy actions will eventually allow investors to look past the current gloom and focus on brighter business prospects emerging on the horizon.