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Market Commentary - May 2010

Not So Merry Month of May
May has been a miserable month for our stock allocations, the worst since February 2009. We have officially entered correction territory, with stocks falling more than 10% from their April highs. In the month of May, the Dow lost approx. 7.9%; the S&P 500, 8.2%.

It has been particularly trying, following hard upon a much needed market rebound over the last 14 months, and a still unexplained “mini-crash” in mid May. This is no time, if there ever was a time, for market timing.  Although we have reduced the stock portions in many of our clients’ portfolios earlier in the year, particularly those who had participated most fully in the recovery of the market, now it’s appropriate to step back and let equity markets settle. Your investment plan, with an appropriate allocation in stocks, fixed income, and short term investments, is our best defense against short term volatility.

The US and Global economies are much stronger today than they were a year ago. While the fast upward pace of gains in leading indicators has slowed for the first time in 12 months (see chart) it’s unlikely that we are looking at another recession.

There is no one reason for the declines, but certainly the unsettling economic worries among the 16 Euro zone economies have been the prime mover. After rioting in the streets of Athens, and several ineffectual reassurances from the European finance ministers that they had a plan in place, markets remained unconvinced and kept falling, finally making a lukewarm response to a last minute one trillion dollar rescue package. With this as a backdrop, and the accompanying fear that it could contaminate the US banking markets, we watched with frustration as oil leaked uncontrollably from the Gulf, frustrating our best fixes, and relations between North and South Korea collapsed to a new low, with all the potential for armed conflict.  It’s a wonder markets didn’t fall even further.

A “two step forward one step back” pattern, which we talked about in our quarterly letters earlier this year, and in our May client meeting, is fairly typical of markets after exceptionally strong gains.  Although the steep declines in May brought back some bad memories, this seems to us like retrenchment and consolidation in a market that is headed much higher. We think the case for steadily improving economic fundamentals in the intermediate term is still intact, albeit more slowly, and with more volatility.  Although every down day seems to last forever, it is not likely to be that long in real time before improving economic fundamentals will once again lift the market beyond its
April levels.   

- Steve Weber
The Bedminster Group

TAGGED: Market Insights
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