Market Insight - July 2011
In our April investment letter to our clients, we noted that the first quarter of 2011 was the best first quarter in over two decades. We also felt that “…expectations have been raised, though, in almost every area except home prices, and the possibilities for disappointment and a meaningful correction of the market this year seems more and more likely.” Well, we hadn’t long to wait, as the market took a tumble in May and early June. It seemed like an eerie replay of 2nd quarter last year, with the very same culprits, a slowdown in our GDP growth and fears of global default. It was enough to hamstring the markets until the final days of June, when a powerful rally drove stock prices out of the red.
To begin with, higher food and gas prices took their toll on consumer confidence and spending. There was certainly little to be optimistic about in the housing market. Revised figures showed first quarter 2011 GDP growth had slowed to 1.9 percent, and the consensus for second quarter growth has been lowered from 3.1 percent to 2.3 percent. Still expanding, to be sure, but less than the 3 percent growth rate needed to prevent unemployment from rising, and well below the 5 percent growth rate required to meaningfully reduce unemployment.
A strong finish during the closing days of June pushed the Dow into positive territory for the quarter, but with less than a percent gain. The S&P 500 fell a fraction of a percent for the last three months; but remained ahead 5.98 percent year to date. Global credit fears took their toll on international stocks early in the quarter, but growing confidence in a settlement of the Greek debt issue pushed the averages up in the final days; the EAFE Index of Developed Markets gained 1.63 percent for the quarter and 5.01 percent for the year to date. Emerging markets, measured by the EAFE Emerging Market Index, made fractional gains for the quarter, but remained down 1.5 percent year to date. Investment real estate put in the strongest performance, with the Cohen and Steers Realty Majors Index adding 4.17 percent for the quarter, and 11.93 percent for the year to date.
Despite the recent rough patch, and the probability of more volatility in the second half of the year, we think 2011 will be a good year for the globally balanced strategy that characterizes our clients’ investment approach. Oil and gas prices have been falling, and higher food prices, while still painful, are subject to supply and shifting buying habits, and are likely to moderate somewhat in the second half. Consumers have shown themselves able to adjust very quickly. Global supply issues affected by problems in Japan’s production have also begun to normalize. The Euro crisis is contained, if not solved, and we believe cooler heads will prevail in Congress and lead to a constructive resolution of the debt limit negotiations. Investor sentiment is poor, which is usually a contrarian indicator, and the lowered earnings expectations and relatively modest PE ratios seem to limit the stock market's downside risk. Credit markets have been stable, as inflation concerns here are muted, and fears of systemic default in the Municipal bond market have receded.
July 7, 2011