2nd Quarter Client Note

By Steven Smith | Investment Management

Jul 10

The S & P 500 Index fell 2.75% during the second quarter. Following the 12.59% gain in the first quarter, the index remained up 9.49% over the course of the first six months. Early in the quarter, the S & P 500 had been down 10%, but recovered much of those losses, including 2.5% in its last “at bat” on June 30. According to Lipper, the average large cap core fund was down 3.73% in the second quarter.

On the international front, losses were greater. The MSCI EAFE developed markets index lost 8.37% erasing nearly all of its first quarter gains.

Bonds rallied, as is usually the case when stocks sell off. (The money has to go somewhere.) The Barclays Aggregate US Bond Index increased 2.06% in the quarter.

A number of factors contributed to the decline. Most notably, continued angst over Greece and the future of the euro. (I particularly liked Dimensional Fund Advisors take on the Eurozone and Greece, placing the issues in some needed perspective.) In addition, the inability to get the unemployment rate down despite decent job growth (new entrants to the labor market every month require the creation of more jobs than those that have been lost to reduce the rate of unemployment.) Even China’s booming economy appears to be slowing. And the housing recovery remains a question mark.

Getting Unstuck

Continuing “uncertainty” is frequently cited as reasons for companies not to hire and for individuals not to invest. The Presidential election and Congressional posturing are likely to dominate the headlines between now and November 6. (Woe unto those of us who live in a swing state like Colorado. We are already bombarded with ads.) Issues often cited are future tax rates, given the scheduled expiration of the Bush tax cuts. The bipartisan deficit deal reached to create $1.5 trillion in spending cuts over the next decade (including $350 billion in defense cuts) is already being called into question. Whether a compromise will be reached either before the election, during a lame duck session or in 2013 is clearly uncertain.

But there is always uncertainty. Most of this falls within the class of “known unknowns” which the market has already taken into account. That’s part of the risk equation. Corporations and individuals have paid down debt and are hoarding cash. The economy is slowly recovering from the financial crisis. And before you know it the election will be behind us.

All of which suggests that planning for the future, including maintaining just the right amount of risk to meet your goals and to match your risk tolerance, remains the winning strategy.

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