Market Recap
Equity prices rebounded significantly during the second quarter of 2009. All major indexes were up double digits for the quarter. The Russell 2000 Index and the NASDAQ Composite led the way, gaining 20.2% and 20.0% respectively. We continue to believe that the market established a bottom on March 9th and will continue to recover throughout the end of the year, but at a slower pace than what we saw in the second quarter.
The Federal Reserve Bank left key short-term lending rates unchanged for the second quarter. Monetary policy will continue to focus on economic recovery, rather than on inflationary pressures. We feel in the short term, this is good policy, however longer term, the huge expansion of the money supply could lead to higher inflation.
The Numbers
Second Quarter 2009
The S&P 500 index gained 121 points or 15.2%.
The Russell 2000 index gained 85 points or 20.2%.
The Nasdaq Composite gained 306 points or 20%.
Index 6/30/09 12/31/08 QTR %Chg YTD%Chg
S&P 500 919.32 903.25 15.2 1.8
Russell 2000 508.28 499.45 20.2 1.8
Nasdaq Composite 1835.04 1577.03 20 16.4
U.S. Treasury yields continued to rise during the second quarter. This increase was largely due to longer-term inflationary concerns. Economists are concerned that the huge expansion in the money supply will eventually lead to higher inflation.
Yield 6/30/09 12/31/08 QTR Chg YTD Chg
1 Yr Treasury 0.56% 0.27% -0.01% 0.29%
5 Yr Treasury 2.54% 1.55% 0.87% 0.99%
10 Yr Treasury 3.53% 2.25% 0.82% 1.28%
The Federal Discount Rate remains at 0.50% vs. 2.25% a year ago.
Conventional FHA 30 year mortgage rates rose above 5%, to an APR 5.28%.
The unemployment rate increased to 9.5% during the second quarter of 2009.
Summary
Economic recovery will be slow. A massive de-leveraging is taking place in the global economy. Banks and consumers are shoring up their balance sheets. Mortgage rates have risen, which will slow a recovery in housing. Unemployment will continue to rise, as corporations will be cautious in adding workers during the initial phase of economic expansion. Tax increases to fill budget shortfalls at the local level, will also lead to a reduction in discretionary income.
Banks will continue to strengthen their capital requirements and tighten their lending standards. This will lead to a diminished access to credit, which in turn will slow future economic expansion. In the long run, this makes our lending institutions stronger, but will prolong the recovery process.
Households have pared their spending habits due to fears of unemployment. The national savings rate is now at 5%. Individuals are paying off credit card debt, while reducing their spending. Again, this is healthy activity for the longer-term, but will prolong the recovery process.
Unemployment will continue to rise throughout 2009. While unemployment continues to grow, unemployment is a lagging indicator and will not improve until recovery is well underway in 2010. This will continue to hamper consumer confidence, which in turn will slow the recovery process as well.
State governments across the country are increasing taxes to cover budget shortfalls. These increases will place an additional burden on households and reduce discretionary income. It may be too early to judge the effects of the tax increases, but in all likelihood, they will lead to lower discretionary income and consumer spending.
What does all this mean? This may prove to be an atypical recovery compared to those experienced in past recessions. In all likelihood, over the next couple of years, we could experience slower economic growth, lower investment returns, higher unemployment and inflation. With this in mind, we encourage investors to remain focused on long-term goals. Refrain from market timing. This will prove to be frustrating and lead to lower investment returns over the long run. Dollar cost averaging is by far the superior approach. Continue with a disciplined investment strategy for accumulating wealth and remain diversified across all asset classes.