July Update
Will it be a lazy hazy day of summer…..or just more rain? It seems like summer has just recently arrived and let’s hope it stays around for a while. In the meantime, stocks have been on a tear since early March but has given some of its gain back over the past four weeks. Whether it is the weather or the stock market, there’s one thing for certain and that is you can’t depend on either of them!
The first half of 2009 featured two extremely different markets. The first two and a half months of the year reflected a sharp decline driven by downward revisions in economic forecasts, liquidation-forced selling by hedge funds and mutual funds, and general fear regarding the stability of our financial system. The final three and a half months, however, produced one of the most spectacular rallies in the history of the stock market. The S&P 1500 Index soared 41.49% from March 9 through June 2 (just 59 trading days), which equates to an annualized pace of 340.33%. The market finished the month of June nearly unchanged from its peak on June 2.
Despite the stalled rally, the financial markets posted exceptional performance during the 2nd quarter of 2009. All major indexes finished with double-digit percentage gains for the quarter. Will the markets recover from the recent weakness and again post gains for the 3rd quarter? That will depend on what companies say in the near future regarding theirs and the economy’s prospects.
The Dow Jones Industrial Average posted an 11 percent gain during the 2nd quarter while the Standard & Poor’s 500 Index gained 15.2 percent. The positive performance marked the first quarterly gains for both indexes since the 3rd quarter of 2007. Quarterly pere was the best for the Dow since 2003 and for S&P 500 since 1998.
2nd quarter returns also moved the S&P 500 Index and the NASDAQ Composite Index year-to-date returns positive. The tech stock heavy NASDAQ rose 20 percent, posting its first positive quarter in a year and its best quarter since 2003.
This week, a number of larger firms will be reporting second quarter earnings. The level and quality of the earnings reports will likely impact stock performance the most in the coming weeks. The potential for strong up and weak days in the coming weeks is higher than normal. The daily, weekly, monthly or even quarterly swings in the markets aren’t of concern to us at the moment because we’re positioning our portfolios for the next five years from these levels.
Parts of the markets have been too overvalued so recently, we have taken advantage of the volatility to invest in them. Our core positions are the S&P 500, Russell 2000 and developed Europe but we have been adding satellite positions in Emerging Markets (especially China, Hong Kong and Latin America), technology, energy and financials. Because of the trillions of dollars being spent around the world in stimulus packages, we have hedged our portfolios against the potential for inflation by adding gold, commodities and real estate.
I’m not sure how stocks will behave for the rest of the summer or 2009 for that matter, but I am optimistic about the next five years.