All of the major U.S. equity indices gained about 7.00 percent in July.  The EAFE (Europe, Asia, and the Far East) lead the way, posting a 9.49 percent return while Emerging Markets returned 8.40 percent in July.  Commodities, as measured by the Reuters/Jefferies CRB Index, were up 6.14 percent for the month, but still down 3.11 since the beginning of the year.  In the bond market, high yield and corporate bonds were the top performing sectors, returning 3.46 and 2.05 percent respectively.  U.S. Treasuries were up 0.68 percent and Inflation Notes (TIPS) returned 0.15%.

There will be many twists and turns to the market in the upcoming months.  Our advice to our independent advisors and their clients is to focus on the client’s long-term investment objectives and their risk tolerance and not be consumed with things you cannot control – i.e., the direction of the market.  Our portfolios are designed and managed to a specific risk level with a truly long-term focus.  In our opinion, a diversified portfolio with actively managed risk and a long-term view is the formula for success in these uncertain times.        

While there is plenty to worry about, there are also some rays of hope.  Interest rates and mortgage rates remain low providing consumers, corporations and the government with very attractive, low cost funding.  Inflation is contained and should stay low for the immediate future.  The Federal Reserve continues to pursue an accommodative monetary policy in the hope of spurring business activity once again.  Corporations have improved their profitability through cost cutting, restructuring and refinancing, thus positioning them for future growth.   

 Below are the total returns for the major indices for the first half of 2010.

Dow Jones Industrial Average                    -4.82%

S&P 500                                                      -6.64%

S&P Mid-Cap                                              -1.35%

Russell 2000 (small cap)                            -1.95%

International Stocks (MSCI EAFE)             -12.93%

High Yield Bonds (Merrill)                           3.18%

Aggregate Bond (U.S. Barclays)                  5.33%

While stock markets struggled, the fixed income market chugged along providing investors with a safe haven and attractive returns.   U.S. Treasury Notes have been the best performing sector within the bond market as they benefitted from a global flight to quality.  Corporate bonds, mortgage backed securities and high yield bonds lagged Treasuries, but still showed competitive total returns for the period.  The short end of the yield curve is currently locked down by the Federal Reserve’s Monetary Policy.  Interest rates on the long end of the yield curve moved lower as investor embraced the double dip scenario.   

As the third quarter gets under way it is clear that volatility is back and investors will need to exercise caution.  Trying to predict the direction of the market is usually impossible, but building a long-term investment portfolio designed to meet a specific risk tolerance and long-term investment objectives is not.  Now is a great time to get your portfolio in sync with your long-term investment plan.  

The S&P 500 fell 7.98% in May and June is following suit.  Our incoming e-mails and telephone calls have increased as clients and advisers worry about the market and their portfolios.  Showing some concern and respect for the market is a good thing, but any emotional rush to judgement tells me there is a problem with the foundation: the investment plan not in sync with the person’s risk tolerance.  Monies invested in the equity or bond market are going to flucuate in value, but these monies should be invested with a long-term time horizon.  Time has taught us that markets are resilient and if investors can set realistic expectations while maintaining a long-term prospective they will position themselves to take advantage of the long-term potential of the markets.

We can not change the world we live in, but we can take a long-term approach to investing that quiets much of the background noise.  First and foremost, perform a thorough and truthful risk assessment to make sure your portfolio reflects a risk level within your comfort zone.  Once at a horse race track there was a message in the day’s program that said, “Bet with your head and not over it”.  This is great advice for the track, Las Vegas and even the stock market.  Second point is to insure your portfolio has adequate diversification.  Every day the market has winners and losers, and if your portfolio is properly diversified you will have the diversification necessary to smooth out the ride and weather the storms.

Personally, I’m always cautious about making a big bet on market direction.  I would rather lean a bit bearish or a bit bullish, but not let my portfolio drift out of sight from its long-term investment objectives.  Based on the fourteen month run in the market and the increased headline risk, leaning a bit bearish at this moment in time is prudent.  The market will likely be choppy in the months ahead.  Any pull back in equity prices will be a healthly long-term event.  It’s not all doom and gloom though.  Company earnings are improving, the economy has bottomed and the employment picture is beginning a long slow road back to normal.  Do not throw in the towel on your investment plan, rather use the market turmoil to your advantage.

Dow Jones Industrial Average                    4.99%

S&P 500                                                      5.39%

S&P Mid Cap                                               9.09%

Russell 2000 (small cap)                            8.85%

International Stocks (MSCI EAFE)               0.94%

High Yield Bonds (Merrill)                          4.82%

Aggregate Bond (U.S. Barclays)                  1.78%

The trends that began lifting the equity markets one year ago continue to boost share prices.  Corporate earnings are surprising the market to the upside and the U.S. economy has halted its downslide.  For the Dow Jones Industrial Average this quarter marks the fourth consecutive quarterly gain and this quarter is the best start to a year since 1999.  Unfortunately, individual investors may be missing this rally as they are pouring money into bond mutual funds while staying away from equity mutual funds. Similar to last year’s results, the more volatile small and mid-sized stocks outperformed larger cap stocks.  International stocks posted small gains as turmoil in Europe and the threat of tighter monetary policy in China cooled investor appetite for foreign stocks.  Commodity prices had mixed results in the first quarter.

The fixed income market returned to a more normal state in the first quarter after two years of extremely volatility.  U.S. Treasury Bonds, corporate bonds and mortgage backed securities are beginning to move in the same direction once again.  The short end of the yield curve is currently locked down by the Federal Reserve’s Monetary Policy while interest rates on the long end of the yield curve are starting to move higher fueled by investor concerns of inflation and eventual economic recovery.    

As the second quarter gets under way, stocks face perhaps their biggest hurdle of the year.  At some point, the Federal Reserve will need to reverse its unprecedented easing of credit.  If the Fed’s removal of credit-market supports fail to go smoothly stocks could move lower.  On a positive note, corporate balance sheets in good shape and valuations reasonable, so the bullish momentum may well continue into the second quarter.

Trying to predict the direction of the market usually impossible, but building a long-term investment portfolio designed to meet a client’s risk tolerance and long-term investment objectives is not.  Now is a great time to review your investment portfolio to see if it is in sync with your long-term plan.  

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Stock Market Benchmarks:

                                                             12/31/09                 12/31/08                 Return    

• Dow Jones Industrial Average   10,428                     8,776                      18.8%
• S & P 500                                     1,115                        903                      23.5%
• S & P 400 Mid Cap                         727                        538                      35.1%
• NASDAQ                                     2,269                     1,577                      43.9%
• Dow Jones Utilities                         398                        371                        7.3%
• NYSE Financial                           4,737                     3,848                      23.1%
• NYSE Energy                            11,527                     9,434                       22.2%
• BBG Reit                                        145                        120                       20.8%

When 2009 started most market prognosticators did not project returns like this.  When we bottomed in early March, the emotional state of the market was gripped by fear and pessimism. History has taught us numerous times to buy stocks when fear is rampant and sell when greed rules.  It is easy to say this, but much harder to implement.  To avoid the trap of selling low and buying high try a new approach.  My advice is to not let your market opinion (or anyone else’s market opinion that you follow) get in the way of investing properly.  For 2010 and beyond it is important for the individual investor to build a diversified portfolio using ETFs and/or mutual funds.  Hold your core equity sectors (U.S, stocks and International equities) through thick and thin and be opportunistic in the “explore” segments of the market using gold, real estate, emerging markets, energy, and agriculture as places to add value.  This is our approach at Gradient Investments and it served our clients well in 2009.    

Key Bond Rates:                               12/31/09                  12/31/08                 Return

• U.S. 3-Month T-Bill                   0.04%                    0.09%                      +0.21%
• 2-Year U.S. Treasury                 1.06%                    0.77%                      +1.05%
• 10-Year U.S. Treasury               3.82%                    2.25%                      (9.71)%
• 30-Year U.S. Treasury               4.64%                    2.68%                    (25.98)%
• 30-Year Fixed Mortgage            5.36%                    5.14%                      +5.87%
• BBG Investment Grade Corp     4.98%                    6.17%                      19.76%
• BBG High Yield Corp Bond      9.44%                  16.72%                      57.51%

The U.S. fixed income market has never had the disparity of returns among the sectors like we saw in 2009.  Long U.S. Treasuries had their worse total return year ever and corporate bonds had one of their best.  The numbers above tell the story. 2010 will not be a repeat of last year.  The entire investment grade bond market yields 3.5% and fixed investors should set their return expectations near this number.  I expect Treasuries to continue to be under pressure with corporate bonds and mortgage backed securities offering slightly better value.  The individual investor needs to own these sectors via EFTs and no-load mutual fund.  We are moving our durations shorter to protect against a likely increase in interest rates in 2010.

The start of a new year is a perfect time to review your portfolio, assess your portfolio’s risk level and check to see if it is in line with your personal risk tolerance level. It has been a wild ride the past two years.  Moving forward, spend less time worrying about the market’s next move and more time focused on your investment approach.  You will sleep better and enjoy better investment results.

http://online.wsj.com/article/BT-CO-20091215-712546.html

http://news.yahoo.com/s/nm/20091215/bs_nm/us_markets_stocks

http://www.mainstreet.com/article/moneyinvesting/news/when-will-fed-raise-interest-rates

Schmidt is a great example of the talent and expertise available through Gradient Investments. Call us today at 888.824.3525.

Technical analysis is a method of evaluating securities by relying on the assumption that market data, such as charts of price, volume, and open interest, can help predict future market trends. Technical analysts believe that they can accurately predict the future price of a security by looking at its historical prices and other variables.

While the S&P 500 has appreciated 66.6% from its March 666 lows to its current 1,110, it is still in technical terms defined as Bear Market Rally.  A weekly closely above 1,126 on the S&P 500 would represent a 50% retracement of the Bear Market Phase and mark an official technical end to this Bear Market.  The S&P high was 1,566 in October 2007 and the low was 666 in March 2009.  1,126 would mark the half way point back to the previous high from the low point.  The 1,126 level on the S&P 500 is a line in the sand for market technicans.  The market will test this line and if it breaks through on a weekly close, expect prices to move higher and this level will become support for the market.  If the market fails at 1,126 expect a correction in stock prices.

While it is exciting to watch the market story play out, do not forget that your investment goals should be long-term.  Build your investment portfolio with the right time horizon and risk levels, then the never ending market volatility will not throw you off course.