Second Quarter 2010 Market Commentary
Volatility returned to the market with a vengeance in the second quarter. Indices we use for benchmarking show the most recent quarter, 6 month and twelve month returns through June 30: S&P 500, (11.42%), (6.65%) and 14.43%; Russell 2000, (9.92%), (1.95%), and 21.49%; and MSCI-EAFE, (13.91%), (13.1%), and 6.17%. Fixed income investors continue to earn extremely low returns in treasury bonds, money market funds, and CD’s. The ten year treasury dropped below 3% recently, and Barclays Capital Aggregate Bond Index returned 3.49%, 5.33% and 9.5% for the same periods reflecting higher bond prices due to decreases in interest rates and investor flight to presumed safety.
Key drivers in the recent volatility are sovereign debt issues in the European Union and slowdown of growth worldwide. That being said, the EU has established remedies for the countries in question, and it appears likely that they will manage these issues. While it is true that growth has slowed down, it does remain positive. Negativity also continues in concerns about the U.S. government debt burden, unemployment, and equity valuations. Consumer confidence numbers were down in June because of these worries and because concerns about the potential for a double dip recession have again surfaced.
Our take on the double dip recession is that while the potential is always there, the probability of it happening is low. The common definition of a double dip recession is one that happens within a year of the last recession. Historically, this is very rare with only one occurrence in the past 70 years and that was in 1981 when it was engineered to kill the high rate of inflation. And, as some analysts point out, the economy has certainly not had enough of a “boom” to cause a “bust.” Inflation remains under control and with consumer confidence and spending low is likely to remain so for the foreseeable future.
Additionally, the focus on government debt that we see in the press is very positive as you can not solve a problem you do not recognize. Governments around the world are wrestling with debt issues and because of this we believe they will be resolved, although this is likely to take the better part of the next decade.
We believe that equity markets are trading at some of the best values ever. As an example, the average forward earnings multiple of the S&P 500 is about 15 in periods of average inflation. That would say that perhaps 17 to 18 would be reasonable in today’s very low inflationary environment. Instead, the P/E of the S&P 500 is currently 11. Similar comparisons can be made on virtually all indexes. While it is difficult to go against the common thought process, markets have rewarded those who have purchased or held on to their equity positions in periods of great pessimism, and we encourage you to continue in your recommended asset allocation unless something significant has changed in your life.
As always, please do not hesitate to call us with your concerns and to continue planning for your future. You remain our number one priority, and we look forward to helping you meet your goals.
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