Mid-Year Review 2010
The second quarter ended a great run in the equity markets dating back to the March, 2009 bottom. The growing list of global problems proved too much for the current market to digest. From overseas, the sovereign risk and debt crisis in Europe weighed heavy on the market. In the U.S., the economic headwinds came from multiple directions: continued high unemployment rates, a depressed housing market, and high mortgage delinquency rates, huge deficits at the state, local and federal levels, and the economic and environmental impact of the BP oil spill.
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.