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Randall Financial Group News

17-Jul-09

2009 Q2 Market Summary

The second quarter of 2009 marks the first time we have had an opportunity to report positive news in well over a year. Global equity markets staged a significant rebound in the 2nd quarter leaving them flat to positive for 2009. Domestic markets staged strong performance as the S&P 500 was up 15.22% for the quarter while the Dow Jones Industrials were up 11.96%. Among the strongest sectors were technology issues, as indicated by the tech heavy NASDAQ, which was up 20.05% for the quarter. But the best performance was seen overseas. The MSCI EAFE index of developed nations was up 23.76% for the quarter. Emerging markets, led by a rebound in India and China had their best quarter ever, up 33.57% for the quarter and 34.26% YTD. Also seeing a significant increase was the price of oil closing at $70 per barrel at the end of the second quarter, up from $45 per barrel at the beginning of the year.

The global equity rally can be attributed to several economic indicators that suggest the pace of recession might be slowing and the early stages of a recovery are underway. Indicators such as second quarter GDP, while not positive, did post much smaller declines. Additionally, credit markets appear to have stabilized with many businesses reporting easier and less expensive access to capital. Continued loose fiscal policy also had a positive effect with the Fed purchasing billions of dollars in mortgage and treasury bonds in a successful attempt to lower the cost of financing a home. While these events are all positive, it remains too early to call a recovery. Currently 5 of 10 leading economic indicators showed a Q2 increase. Historically when this number reaches 9 of 10, the U.S. economy has emerged from recession.

Some stabilization can also be seen in the housing sector. While prices have clearly not recovered, the rate of decline has lessened as the April month over month decline was only 0.7% vs. a 19.4% decline in January of this year. Another glass is half-full category would be employment. Labor markets remain under significant pressure but the pace of layoffs has moderated with initial jobless claims down from their peak levels in March. But employment is a lagging indicator of economic recovery and the overall picture remains grim (see chart at left). Continuing jobless claims have hit an all time high with the national unemployment rate approaching 10%, the highest rate since 1983.

Current fiscal policy, which is highly stimulative, is in reaction to massive deleveraging on the part of households and financial institutions. Debt levels for households and financial institutions rose significantly by 2008. As the economy began to contract, individuals and institutions reduced borrowing by increasing savings and reducing debt, a process referred to by economists as deleveraging. This deleveraging takes funds away from purchase and investment, which causes economic contraction. The government responded by pumping money into the economy in order to spur growth and expansion. It is this stimulative fiscal policy that raises concern over the mid to long term. While there is little debate that these actions are currently necessary, the question is for how long. Excessive stimulus can bring about inflation.

While actual inflation remains minimal, there have been some signs. Producer (see graph) and consumer prices showed significant up ticks in June, with the consumer price index rising at its fastest rate in 11 months. The increase in prices can largely be attributed to the dramatic rise in oil prices. But the core index that excludes volatile food and energy prices still showed an increase. Another inflation indicator, gold prices, have continued to rally in the 2nd quarter. Its important to note, however, that year over year prices remain down and its likely that recent price increases are the result of recovery in asset prices rather than true inflation. High unemployment and record low industrial utilization are likely to keep inflation in check in the near term. But the longer-term threat remains and investors should stay vigilant.

Its too early to be certain if were in the midst of a full-fledged recovery or just a short-term improvement in various indicators. Our feeling is that stabilization is the first step to any improvement and we do seem to have stabilized. But we are doubtful that any economic recovery will be rapid, likely playing out well into 2010. In the mean time well be keeping a close eye on 2nd quarter corporate earnings coming this week and next. That will be a major factor in maintaining any market rally. Well also be vigilant toward any signs that inflation is heating up. Information presented here is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change.

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