|
QUARTERLY
MARKET UPDATE as of July 2010
Stock markets worldwide sold off in the Second Quarter. The U.S. market, as measured by the Standard and Poor’s 500 Index, was off 11% during the full quarter. The peak was reached in late April after nearly an 80% gain from the bear market lows of 2009. Since then we have experienced a 14% correction. International markets were off greater amounts as they struggled under currency pressures. The broad based MS EAFE Index, measuring markets from Europe, Australia and the Far East declined by over 14% during the full quarter. The bond market, on the other hand, showed positive returns of 1-2% as interest rates remained at historic lows.
There are many reasons that could be used to explain the recent selloff. Perhaps the strongest is that a correction is expected after such a sharp, uninterrupted rise in the stock market. European debt problems, the Gulf oil spill, recently passed health care reform or the current debate on financial reform are all on investors’ worry list as well. Our greatest concern is the slow pace of recovery in our economy. First quarter GDP growth was revised downward to an annual rate of 2.7% and consensus estimates place the remainder of 2010 at similar rates. This level of recovery is disappointing given the enormous level of stimulus that has been injected into and remains in our economy by government forces. Market behavior of late is very likely reflecting this disappointment.
Talk of a “double dip” recession has been growing. This discussion is often centered on the fact that unemployment remains stubbornly high at 9.7% and job growth has largely been limited to temporary government jobs. For example, in May there were 431,000 new jobs created but 411,000 of those jobs were temporary Government Census workers. The expectation for June is a resumption of slow job growth as those Census worker jobs disappear. Clearly, with the consumer representing nearly two thirds of our economy, we need to see sustainable job growth in order to have more robust GDP growth.
Perhaps the greatest cloud over job creation today is uncertainty regarding tax policy going forward. As we stand now, a number of tax increases will automatically occur at year end as the 2001 and 2003 tax cuts expire. The uncertainty of where tax rates will be next year has delayed many businesses hiring decisions. Until Congress addresses this issue we don’t expect to see large private sector job creation because uncertainty is the enemy of investment and growth. Clear direction on this issue would swiftly improve the job outlook and market tenor, in our opinion.
We do see several positive trends present in today’s environment. Industrial production continues to improve as corporations rebuild inventories that had been depleted last year. Personal income gains and spending data have resumed an upward trajectory. Inflation remains under control with the most recent data showing a 1.3% annual inflation rate. Housing prices have stopped their torrential decline and appear to be stabilizing. Certain consumer sectors are seeing sales increases well beyond expectations (i.e. three block long lines to buy $400 Smart Phones). Above all, we believe valuation levels that markets trade at today are reasonable and offer long term value.
We continue to believe that focusing on strong fundamentals will help to weather any future storms on the horizon. Bond investors should continue to focus on short/intermediate term maturities, especially with interest rates remaining at historically low levels. In this environment it is wise to invest in stocks with a pick instead of a shovel as attention to detail is imperative. We will continue to focus on quality in the investment management process. Quality growth oriented companies that offer solid balance sheets, above average returns on shareholders equity, strong cash flow generation, and attractive valuation levels should continue to provide strong relative returns.
|
