2010 Second Quarterly Report

Published: July 27th, 2010

The weather is heating up and unfortunately the markets have cooled down.  Market volatility has once again returned in the second quarter, virtually undoing all gains witnessed in the first quarter.  As we approach the mid-year mark, total returns are dipping into negative territory.  With 2008 still fresh in our minds, I am sure this has left many of you unsettled.  We are in a somewhat fragile economic recovery, and overall we expect growth in the balance of 2010 to be slow and hampered. 

Here is a brief overview of some more notable events this past quarter:

• The G20 Summit recently met in Toronto and the nations agreed to try and cut deficits by 2013 and cap debt ratios
• Jobless claims remain elevated
• A financial overhaul for the banking industry primarily related to hedge funds and derivatives investing continues
• Growth of GDP revised downward from 3% to 2.7%
• Even with the loss of jobs, the unemployment rate actually fell to 9.5% because the labor force contracted by 652,000.  This could mean people have just stopped looking.
• In last week’s GDP report, corporate profits increased for the fifth consecutive quarter. 
• Markets have all but ignored the corporate improved earnings thus far for 2010
• Leading economic indications rose .4% in May, and many analysts expect sound economic activity for the remainder of the year.
• Structural weaknesses in employment and housing may prevent a further breakout in the upside this year.
• Manufacturing has experienced a V shaped recovery
• Consumer spending rose in May and incomes were up by .4%

As you can see, amidst the negative data, there are still many positives that can be pulled from some of the data bulleted above.  However, this recovery is likely to be a long process with the end resulting in a much more subdued economy. One would think that positive corporate profits would help push the stock market higher, but obviously, it hasn’t.  The markets are instead focused on “macro” factors, such as employment and unemployment, inflation, and the sovereign debts of certain foreign countries.  The data that usually drives markets upward seems to be irrelevant such as sales, earnings, dividends, and all the other factors that are used to evaluate in making investment decisions.

Although it is tough to make a prediction on which direction the markets will end up in 2010, we have made a lot of headway out of the recession and corporations appear to be moving in the right direction.  We knew this was going to be a long haul and we still encourage you to remain invested as you are unless there are changes in your personal financial situation or your risk tolerance and objectives have changed.

Among the numerous resources we review each month is research put out by Oppenheimer Funds and their Chief Economist Dr. Jerry Webman.  We think that Dr. Webman’s most recent article (copy enclosed) gives a good overview of what has passed and what may be ahead in 2010.   Among his observations: The U.S. economy is still on reasonably sound footing, and interest rates are set to remain low for a long time; Widening fixed income spreads have created opportunities for investors; The cyclical rally in the U.S. may still have legs, and emerging markets appear set to continue their long-term secular expansion.  

As always, should you need to discuss your portfolio please do not hesitate to contact our office.  I hope you enjoy the rest of your summer!

 Sincerely,

 ARISTA WEALTH ADVISORS

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