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Apr
25
2012

Economic Outlook: The Rally at Six Months

By James Solloway, CFA, Managing Director, Senior Portfolio Manager

It has been a terrific run, with equity markets around the world recording a price gain of close to 20% over the past six months and the S&P 500 advancing more than 28% from its closing low on October 3. As is often the case, this breathtaking move to the upside had its genesis in a period of deep investor gloom. Back in late September and early October, there were many things spooking the financial markets: fears of recession in the U.S., the European debt crisis and the possibility of a hard landing for the Chinese economy, to name a few.

The question now is, "What comes next?" The economic and financial backdrop certainly has improved since the dark days of last autumn, but one can make the argument that the rally already reflects this improvement. Besides, new challenges are coming into view that will test investors and the resiliency of riskier assets in the months to come. In our opinion, the surge in stock prices has brought valuations back in line with the fundamentals. Instead of taking a contrarian stand as we did six months ago, we are more inclined to "go with the flow," maintaining a pro-cyclical investment stance until valuations become more worrisome, or the economic trends start to point toward another period of uncertainty and volatility. We will detail in this report some of the factors that investors should monitor as the rest of the year unfolds.

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This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information is for educational purposes and should not be relied upon by the reader as research or investment advice regarding the funds or any stock in particular nor should it be construed as a recommendation to purchase or sell a security, including futures contracts. There is no assurance as of the date of this material that the securities mentioned remain in or out of the SEI Funds. There are risks involved with investing, including loss of principal. Diversification may not protect against market risk. There are other holdings which are not discussed that may have additional specific risks. In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavourable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity. Bonds and bond funds will decrease in value as interest rates rise.

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