It was good to see the positive performance of the S&P in the first quarter of 2012, its best performance since 1998. However, it’s important to keep in mind some of the unique drivers behind that performance. It benefited from a sea of liquidity and reduced risk premiums and, fueled by only three sectors—financial, technology and consumer discretionary—it was a rather narrow rally.

We maintain a strategic weighting to U.S. equities. At under 14x earnings, forward valuations are not out of line with historic levels while still not cheap.

Since then we’ve seen progress diminish. Most Federal Reserve data show the recovery at low levels or well below average given the stage of the recovery, despite unprecedented economic stimulus. We benefited earlier from the warm winter pulling economic activity forward earlier in the year, with the downside being a further dampening going forward. While we hear talk of a double dip recession, recognize that we are almost five years from the start of the Great Recession so it would not be surprising to experience a recession as part of a market cycle at this time. This premise is supported by the Conference Board’s Index of Leading Indicators and following the trend in comparison to past market cycles.

Much of Europe is in or near recession and we do not expect market performance to improve until there is a concerted response including fiscal reform, European bank recapitalizations, and ECB (i.e., German) debt guarantees. Emerging markets and China have benefited from the consumption trends of the developed world, but as developed economies continue to dampen, emerging markets will feel the impact.

Therefore, we maintain a strategic weighting to U.S. equities. At under 14x earnings, forward valuations are not out of line with historic levels while still not cheap. An additional silver lining, we hope, is that housing appears to be bottoming and should improve in the next year or two. We are maintaining our strategic allocation to equities, fixed income, and diversifying assets and continue to have a major underweight to international developed equities versus U.S. stocks and equal weight to both growth and value stocks.

While we are in a challenging and dynamic investing environment, we have confidence that our asset allocation strategies and manager selections are structured to best position our client portfolios to outperform and manage risk. Tough investing climates can offer the best opportunities to take advantage of mispriced assets.

Jeffrey J. Schappe, CFA, is Chief Investment Strategist for Sterling Capital Management

The opinions contained in the preceding commentary reflect those of Sterling Capital Management LLC, and not those of BB&T Corporation or its executives. The stated opinions are for general information only and are not meant to be predictions or an offer of individual or personalized investment advice. They also are not intended as an offer or solicitation with respect to the purchase or sale of any security. This information and these opinions are subject to change without notice. Any type of investing involves risk and there are no guarantees. Sterling Capital Management LLC does not assume liability for any loss which may result from the reliance by any person upon any such information or opinions.

Investment advisory services are available through Sterling Capital Management LLC, a separate subsidiary of BB&T Corporation. Sterling Capital Management LLC manages customized investment portfolios, provides asset allocation analysis and offers other investment-related services to affluent individuals and businesses. Securities and other investments held in investment management or investment advisory accounts at Sterling Capital Management LLC are not deposits or other obligations of BB&T Corporation, Branch Banking and Trust Company or any affiliate, are not guaranteed by Branch Banking and Trust Company or any other bank, are not insured by the FDIC or any other government agency, and are subject to investment risk, including possible loss of principal invested.

This article originally appeared in the Summer 2012 issue of Wealth magazine.

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