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Market Commentary

Q3 2009

A Mid-Year Review

While market indexes for Q1 2009 were mainly flat, stock investors could scarcely have asked for a much better Q2 2009. For the first time in over a year, all the major indexes began to move into positive territory, if at least temporarily. From their March lows, the S&P 500 at one point had risen just short of 40%, the Dow was up 34.4%, the tech-heavy NASDAQ shot up 46.8%, and small caps climbed a whopping 53.8%.  

Key Economic Data

Recent Market Performance

Mid-Year Economic Review

• Inflation - Investors (and even the Federal Reserve Board) at times seemed uncertain whether to worry more about inflation or deflation. One of the few positive side effects of the sinking economy seemed to be inflation measures that remained relatively benign - particularly compared with a year ago, when skyrocketing oil and food prices helped push the annual inflation rate to 4.2%. As a result, the Fed recently indicated that it doesn't foresee raising interest rates for "an extended period."
• Unemployment - The unemployment rate rose a full percentage point over the quarter, bringing the number of jobs lost since December 2007 to 6.5 million. Including marginally attached and involuntary part-time workers, the unemployment rate reached 16.5% in June. Weekly unemployment figures at quarter's end indicated that job losses could be slowing, though actual gains seemed likely to remain elusive.
• Housing - Sales of existing homes began to turn up in the second quarter, though they were still down by 3.6% from May of last year. However, foreclosures and short sales were a major factor in pushing those numbers higher, as were median home prices that were 16.8% lower than last year. First-time homebuyers lured by a federal tax credit represented a substantial piece of the market. However, by the end of the quarter, problems with conservative home appraisals and rising mortgage rates loomed as potential threats to a housing recovery.
• Treasuries - The difference between 2-year and 10-year Treasury interest rates increased from 1.9% to 2.42% by the end of the quarter. However, it was unclear whether that steeper yield curve represented a harbinger of economic recovery, as it has in the past, or investor concern about increased U.S. Treasury debt.
• Savings Rate - Americans continued to save more. By May, savings represented 6.9% of personal income--quite a change from the 0.0% of early 2008.
• Recession - Most economists agree that this current recession began sometime between December 2007 and January 2008. Eighteen months later and we're beginning to grasp just how large this financial downturn is. Since World War II, the average peak to trough decline in real gross domestic product (GDP) during a recession has been approximately 1.9%. The last two recessions - in 1990 and 2001 - were much softer with declines of 1.3% and 0.2%, respectively. This recession, on the other hand, should see a contraction of real GDP on the order of 2.5%, making it the most severe recession since 1981.

2008 - 2009 Recession Forecast Compared to Prior Recessions 

Economic / Market Predictions

In our January 2009 Market Commentary, the general consensus of the three economists we profiled was that the U.S. economy should see a rebound beginning at the start of Q3 2009.

While no doubt Q2 2009 breathed some life back into the markets, we believe the U.S. economy may actually contract through Q3 2009, and that any recovery may be more gradual than previously thought.

With that being said, it's important to remember that financial markets have already discounted this recession. Market volatility will likely remain high until there is greater clarity. Consequently, for investors who have a long-term perspective and a stomach for short-term volatility, the current market environment may represent an opportunity.

The International Monetary Fund forecast that global recovery would be slower than expected, and that the world economy would shrink by 1.3% this year rather than the 0.5% growth it forecast in January. Next year's 1.9% growth rate forecast was two-thirds of the IMF's January projection for 2010.

Did You Know?

In the year following each of the last six recessions, small-cap stocks outperformed the S&P 500, by anywhere from 1.3% (1970-71) to 28.4% (1980-81).
As always, your questions and comments are appreciated.

Disclosures

All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely-traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The Nasdaq Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.