July 2009: A Second Quarter Update

A quick summary of economies and markets for you.
July 16, 2009
Dear Client,
The quarter that just concluded gave stock market investors reason to celebrate. Let’s look at what happened on Wall Street and in the broad economy this spring.
The quarter in brief. We just saw the best quarter for stocks since 1998 - the S&P 500 gained 15.2% from April to July.1 The global rebound in equities was simply phenomenal this spring. All of it happened while two major automakers went through bankruptcy, major banks weathered the drama of stress tests, and oil prices took off. The Obama administration proposed more reform, and indicators offered hope and hints of economic recovery.
It was another trying quarter for banks and automakers. Once-invincible Chrysler and General Motors each filed for Chapter 11 bankruptcy; with the help of the federal government, Chrysler found a buyer in Fiat. The government simply took a 60% stake in GM as it fostered its reorganization.6 High anxiety preceded the Federal Reserve-administered stress tests of 19 major U.S. banks, and 10 of 19 banks were directed to find more capital – most notably Bank of America, which was told to find another $34 billion. Other big thrifts (among them Goldman Sachs, American Express, MetLife, Capital One, and JPMorgan Chase) were judged adequately capitalized.7
In Washington, reform was in the air. In May, Congress passed new rules forcing credit card issuers to notify cardholders of rate hikes 45 days in advance, restrict credit limits for teens and collegians, and curb retroactive rate increases.8 June saw the Obama administration and Congressional leaders working hard to revamp financial industry regulations and the American healthcare system. The President proposed making the Federal Reserve the great watchdog over major banks, insurers and other financial industry firms. Proposed legislation would give the Fed, Federal Deposit Insurance Corporation and Treasury more power and set up a Consumer Financial Protection Agency to police mortgages and derivatives and credit cards.9 Now, should the government get into the healthcare business? In the vision of the President, such a move could make health care and health insurance more affordable and accessible to 45 million more Americans. Two versions of a bill to do so meandered through Congress in spring. The House version included a government-sponsored healthcare option, and the Senate version jettisoned that idea.10


Major indexes. Look at the turnaround. At the end of June, the S&P 500 was a mindblowing 35.89% above its March 9 low. History will record 2Q 2009 as the best quarter for the S&P since 4Q 1998, the hottest quarter for the NASDAQ since 2Q 2003, and the best quarter for the Dow since 4Q 2003.1

% Change

2Q 2009

1Q 2009










S&P 500




 (Source: CNBC.com, 6/30/09) 1
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly.
These returns do not include dividends.
Global economic health. Were things getting better, or not? The jury was out – though plenty of opinions were in. The World Bank said things were getting worse – it revised its 2009 forecast in June, projecting 2.9% global economic contraction for the year instead of the previously speculated 1.7% decline.11 “We need to clean up the banks,” European Union commissioner Neelie Kroes stated in June, adding that the global economy was “far away from a proper recovery.”12
Housing & interest rates. Were existing home prices cheap enough to spur a sales recovery? Was anyone interesting in buying a new home? Would rising Treasury yields send mortgage rates upward? The respective answers were maybe, maybe not, and perhaps slightly. Answers were still hazy in a sector in which the bottom may or may not have emerged.
Third quarter outlook. The bullish might want to consider the latest Reuters quarterly poll of 150 equity strategists worldwide. In their collective opinion, the S&P 500 will gain another 8% by the end of 2009, and the benchmark indices of Japan, Germany, England and Hong Kong will register double-digit gains in 2010.28 As great as all that sounds, the U.S. and global economy just don’t seem to be rebounding as fast as the markets would like. With unemployment numbers still weighing on stocks at the top of July and the real estate sector still weak, some economists think things won’t really pick up until the end of the third quarter or the start of the fourth quarter. Will the stock market herald the recovery with a fine summer and fall? Let’s hope so, as we close the book on a terrific quarter.
Enjoy the rest of the summer!
Edward J. Kohlhepp, CFP®, ChFC
Edward J. Kohlhepp, Jr., CFP®, MBA
“Employ thy time well, if thou meanest to get leisure.” – Ben Franklin
1 cnbc.com/id/31670314             [6/30/09]
6 usatoday.com/money/autos/2009-06-01-gm-bankruptcy_N.htm?loc=interstitialskip        [6/1/09]
7 federalreserve.gov/newsevents/press/bcreg/bcreg20090507a1.pdf             [5/7/09]
8 smartmoney.com/personal-finance/debt/tighter-credit-card-rules-pass-senate-milestone/             [5/22/09]
9 topics.nytimes.com/topics/reference/timestopics/subjects/c/credit_crisis/financial_regulatory_reform/index.html       [6/17/09]
10 bloomberg.com/apps/news?pid=20601103&sid=aki1sLcOe4GM     [6/26/09]
11 marketwatch.com/story/treasurys-up-on-world-bank-outlook-fed-buyback  [6/22/09]
12 online.wsj.com/article/BT-CO-20090623-703072.html [6/23/09]
28 forbes.com/feeds/reuters/2009/06/30/2009-06-30T141504Z_01_LU614869_RTRIDST_0_MARKETS-STOCKS-POLL-WRAPUP-1.html           [6/30/09]]
Dow Breaks Through 9,000 - S&P 500 Breaks 1,000

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Kohlhepp Investment Advisors, Ltd.
3655 Route 202, Suite 100
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Phone: 215-340-5777
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