7/1/2009 - Second Quarter 2009

Market Overview

Major equity indices posted their first quarterly gain since the third quarter 2007. During the first half of the year, the US markets were led by materials, consumer discretionary and the technology sectors. Importantly, the first half of the year showed positive returns for all major indices year to date except for the DJIA (-3.75%) which was still a much improved performance and welcomed result compared to the first half of 2008, when all three major domestic indices, the Dow, the S&P 500 and the Nasdaq were all down double digits at -14.44%, -12.83% and -13.55%, respectively. 

The overall stock rally that began in mid-March extended its sharp gains before sputtering out in mid June. Only the NASDAQ and Russell 2000 continued an upward June ascent by posting monthly gains of 3.42% and 1.34% respectively. Nevertheless, the US broad market advanced nearly 17% during the quarter, although it did lag MSCI EAFE and MSCI EM international markets by 6.82% and 16.63%respectively. World markets are indicating that the global developing economies may well recover at a quicker pace than the US, with continued prospects of higher growth especially in emerging markets such as South America and the Far East.

However, the market still seems skittish, though much less so than the first quarter of 2009, where extreme volatility was ruling the day. The DJIA has most recently reversed course, perhaps momentarily but has closed negative nine out of the last dozen sessions.

A current dilemma also exists in that some people may not have fully participated in the rally off the March lows and are still skeptical or possibly afraid to commit to the stock market at this time. A low interest rate environment only exacerbates this problem, with cash earning so little.

Our team has taken steps to address this issue, and we feel that we have added some “tools” in our advisory belt to hedge this very dilemma of safety of principal verses the opportunity cost of not participating in the markets. During the fourth quarter of 2008 we began to utilize corporate-backed market linked structured notes offering some downside protection, while having the potential of participating in magnified gains within a range of the U.S. S&P indices. More recently we purchased FDIC certificates of deposit that although are illiquid in the near term, do offer equity like returns based upon the underlying performance of a basket of brand name stocks with global appeal, while simultaneously offering 100% downside protection. This is attractive to us. The possibility of equity like returns while enjoying full principal protection. The only cost being the partial sacrifice of non guaranteed equity upside. We like the trade off.

Please contact us if this strategy interests you or is something you would like to learn more about.

The Bond Market

The credit markets continued to improve during the second quarter 2009. Corporate bond prices moved higher and showed signs of further stabilization after recovering substantially off the lows of September and October 2008 caused initially by the Lehman failure. The Federal Reserve left key rates unchanged at their June meeting. We have seen interest rates on the longer end of the yield curve move up dramatically this year. This has caused last year’s investment winner, US Treasuries, to have a negative return year-to-date, especially the longer Treasuries, like the 20+ year which are down over (19)% through June 30. The US aggregate bond index currently yields 4.12% and the ten year treasury yields 3.43%. Interestingly, municipal bonds yield 4.10%. Could the insolvency of municipalities be the next shoe to drop?

Commodity Update

Gold ended the period ending June 30 th 2008, at $932 per ounce, taking a crazy round trip to ultimately settle a year later at $934.50. Oil’s course over the last twelve months was even stranger. It nearly peaked last June 30th at just above $142 a barrel, crashed to the mid $30 range by December 2008, only to rise almost predictably over the last three months to close at just under $70 per barrel.

In conclusion

The second quarter 2009 was the best quarterly return in the stock market since 1998. That being said, the major indices are still approximately 25%-30% below where they were just a year ago. (So there is still plenty of ground to make up just to get back to where we were even last summer). Going forward, we expect modest returns, albeit in a choppy environment, in the capital markets due to the continued combination of government mandated low interest rates and an increased regulated environment that has become the “new” normal.