2010: A Second Quarter Update

 
A quick summary of economies and markets for you
July 20, 2010
 

 

 

The quarter that just passed was a rocky one on Wall Street; hopefully the coming one will be less stressful, more encouraging and maybe even bring us a market turnaround. Here is a recap of the last three months.

The quarter in brief. The second quarter of 2010 brought a significant correction in the bull market and questions about the pace and strength of the global economic recovery. Few analysts were seeing a bear market ahead, but stocks did retreat – 2Q 2010 was the first down quarter for stocks since 1Q 2009, with the S&P 500 losing 11.86%.1 At the end of the quarter, we had new concerns emerge about the real estate market, a bill poised to become law that would bring great reforms to the financial world, and worries about foreign economies that stole the headlines from corporate earnings and domestic indicators.

Domestic economic health. Consumer spending (the ultimate driver behind any U.S. economic recovery) increased by 0.2% in May after a flat April. As for consumer prices, they fell 0.2% in May following a 0.1% slip in April. Producer prices, too, headed south.

Unemployment may have peaked in April. It was 9.9% then, 9.7% in May and 9.5% for June. However, just 83,000 net jobs were added to the economy in June, and Bureau of Labor Statistics data indicated that the main reason the jobless rate declined was because 625,000 job seekers stopped looking for work.4,5

The Fed did not hike the benchmark interest rate, and there were clear hints that it would not be doing so in the near future. Congress settled on a huge financial reform bill destined for President Obama’s signature. In the biggest victory for Wall Street, the bill permitted banks to continue foreign exchange dealing and interest-rate swaps.10,11

Global economic health. After years of not exactly minding the store, several European countries were looking at massive sovereign debt problems. When the crisis went full-blown in the media in May, Greece, Ireland, Italy, Portugal and Spain held debts ranging from $236 billion to $1.4 trillion – and not only that, these countries owed tens of billions worth of debts to each other.12 An austerity plan and a bailout was rolled out, which the healthier economies of the EU (notably Germany) had trouble stomaching. As the quarter ended, the sense was that a massive credit and banking crisis had been averted … at least for the short run.

World financial markets. We had it rough here in America, but other stock markets had an even tougher time of it in 2Q 2010. France’s CAC 40 was down 13.36% for the quarter, and Brazil’s Bovespa fell 13.41%. The Nikkei 225 dropped 15.40% and the Shanghai Composite took the biggest hit of any overseas benchmark, losing 22.86%. Even England’s FTSE 100 fell 13.43%.

Housing & interest rates. With federal tax credits set to expire, the second quarter was a test for the real estate market. What grade did it earn? How about a D? The month-to-month pace of new home sales, according to the Commerce Department, went from +26.9% (March) to +14.8 (April) to a record low drop of -32.7% (May). Correspondingly, pending home sales fell 30.0% for May. Existing home sales were up 8.0% for April, but down 2.2% for May. Fortunately, in early July, President Obama put the tax credits back in place through September 30.18,19,20,21

 

If the home sales numbers of months past appeared more than a little aided by the government stimulus, another kind of low was getting some very positive attention. Mortgage rates were setting all-time lows. On June 30, Freddie Mac’s Primary Mortgage Market Survey had rates on 30-year FRMs averaging 4.58%. Could rates on the favorite 15-year FRM, fall below 4%? As June concluded, that almost happened: nationwide, they averaged 4.04%.22

 

Looking forward. As we get into the third quarter, the wide belief is that the recovery is still progressing – just not as quickly or as robustly as we would like. It certainly is not thrilling Wall Street. Fears about overseas debt did rock the market in May and June, but we had a series of underwhelming domestic indicators that didn’t help. We seem to have hit a soft spot, particularly in terms of consumer confidence. And what builds up consumer confidence? Employment. Home sales. The sense that the pace of growth in the U.S. economy is accelerating rather than decelerating. So July may be a very important month on Wall Street. We will almost certainly see major volatility. Yet as Standard & Poor’s chief strategist Sam Stovall told AOL’s Daily Finance, “The market is like a rubber band. Stretch it too far, and it's likely to snap back.” Stovall noted that since the early 1920s, Wall Street has seen 41 quarters with declines of worse than 5%, including 2Q 2010. The good news: 29 of the 41 quarters that followed those pullbacks brought gains. Let’s hope history repeats.23

Looking back. So how did the market do last quarter? Well, here are the numbers. For the record, it was the poorest second quarter for the S&P, DJIA and NASDAQ since 2002.1

% Change

2Q 2010

1Q 2010

Y-T-D

DJIA

-9.97

+4.11

-6.27

NASDAQ

-12.04

+5.68

-7.05

S&P 500

-11.86

+4.87

-7.57

10Yr TIPS Yd

-28.13

+8.11

-22.30

 

(Source: CNBC.com, ustreas.gov, 7/1/10)1,24,25

Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly.

These returns do not include dividends.

 

We will follow up soon with our outlook on the rest of the year – watch your inbox for the next issue of Ed’s Eye on the Economy. Stay cool and enjoy the rest of the summer.

 

Sincerely yours,

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA

 

 

 

 

This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting Representative or the Representative’s Broker/Dealer. This information should not be construed as investment advice. The views expressed are not necessarily the opinion of Cambridge Investment Research and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Investing is subject to risks including loss of principal invested. No strategy can assure a profit nor protect against loss. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.

 

 

 

Citations.

1 – cnbc.com/id/38027917 [6/30/10]

2 – bea.gov/newsreleases/national/pi/pinewsrelease.htm [6/28/10]

3 – bls.gov/bls/newsrels.htm#major [7/3/10]

4 – ncsl.org/?tabid=13307 [7/2/10]

5 – newsfeed.time.com/2010/07/02/unemployment-rate-rises-to-9-7-in-june-is-the-recovery-slowing/ [7/2/10]

6 – ism.ws/ISMReport/content.cfm?ItemNumber=10752 [7/3/10]

7 –ism.ws/ISMReport/NonMfgROB.cfm?navItemNumber=12943 [6/3/10]

8 – marketwatch.com/story/us-industrial-output-jumps-12-in-may-2010-06-16 [6/16/10]

9 – ottawacitizen.com/business/factory+orders+decline/3231375/story.html [7/3/10]

10 – abcnews.go.com/Business/financial-reform-bill-means-big-consumers/story?id=11012343 [6/25/10]

11 - cnbc.com/id/37927853 [6/25/10]

12 – nytimes.com/interactive/2010/05/02/weekinreview/02marsh.html [5/1/10]

13 – online.wsj.com/article/SB10001424052748703426004575339730963818218.html [7/2/10]

14 – cnbc.com/id/38027917 [6/30/10]

15 - mscibarra.com/products/indices/international_equity_indices/gimi/stdindex/performance.html [7/1/10]

16 - cnbc.com/id/38027917 [6/30/10]

17 - blogs.wsj.com/marketbeat/2010/06/30/data-points-energy-metals-310/ [6/30/10]

18 - southflorida.bizjournals.com/southflorida/stories/2010/06/21/daily25.html [6/21/10]

19 – marketwatch.com/story/home-buyers-win-more-time-to-claim-tax-credit-2010-07-02 [7/2/10]

20 – realtor.org/press_room/news_releases/2010/07/phs_drop [7/1/10]

21 –liveshots.blogs.foxnews.com/2010/06/22/home-sales-fall-unexpectedly/ [6/22/10]

22 – cnbc.com/id/38037896 [7/1/10]

23 – dailyfinance.com/market-news/ [7/4/10]

24 - cnbc.com/id/36116955 [3/31/10]

25 - ustreas.gov/offices/domestic-finance/debt-management/interest-rate/real_yield_historical.shtml [7/1/10]

 

 

 
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