July 6, 2010

Second Quarter in Review

Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable or not available.

STOCK MARKET RALLY FALTERS ON “MACRO” ISSUES

The stock market rally that began in March 2009 came to an abrupt halt in the second quarter. Despite excellent first quarter corporate earnings in the U.S., investors fretted about larger issues that could overwhelm the economy in the months ahead. These “macro” issues include unsustainable government debt levels in numerous countries, the unwinding of stimulus spending, possible deflation, persistently high unemployment, financial regulation, and a government-orchestrated economic slowdown in China, according to The Wall Street Journal, June 30. These concerns helped send the S&P 500 index to an 11.9% decline in the quarter.

Second Quarter Country Returns Based on the Dow Jones Global Indexes
Ranked by U.S. Dollar Performance

Winners

Other Notables

Source: Dow Jones Indexes

ECONOMY SLOWS DOWN

A variety of economic reports over the past few weeks suggest the economy is slowing down. For example, home sales dropped, consumer confidence slumped, manufacturing growth cooled off, and new claims for unemployment insurance remained high, according to Bloomberg, July 3. However, let’s not get too carried away. A slowdown does not necessarily mean we are headed for another recession.
Today’s weak economy puts policymakers in a tough spot. Normally, fiscal and monetary stimulus is enough to jumpstart growth. Unfortunately, we’ve shot those two rockets and we still haven’t reached escape velocity. If the economy rolls over from here, the question becomes, “Where do we find a third rocket?” According to Tony Crescenzi, strategist and portfolio manager at Pimco, CNBC.com, June 7, our third rocket might consist of time, devaluations, and debt restructurings. If fired, this third rocket could be painful for many Americans.

INTEREST RATES DIVERGE BASED ON RISK PERCEPTION
Today’s weak economy puts policymakers in a tough spot. Normally, fiscal and monetary stimulus is enough to jumpstart growth. Unfortunately, we’ve shot those two rockets and we still haven’t reached escape velocity. If the economy rolls over from here, the question becomes, “Where do we find a third rocket?” According to Tony Crescenzi, strategist and portfolio manager at Pimco, CNBC.com, June 7, our third rocket might consist of time, devaluations, and debt restructurings. If fired, this third rocket could be painful for many Americans.

THE DOLLAR REMAINS POPULAR
Some naysayers think the dollar’s days are numbered, but that countdown had yet to begin in the second quarter. The dollar index, a measure of the dollar’s strength compared to a trade-weighted basket of six other currencies, rose a solid 5.9% in the second quarter, according to MarketWatch. Two major trends are apparently tugging at the dollar and in any given week, one trend seems to outweigh the other. The euro zone debt crisis helped spark a flight to the U.S. dollar and was a major reason why the dollar jumped sharply in the second quarter. However, toward the end of the quarter, disappointing economic numbers out of the U.S. and new austerity measures in the euro zone led some investors to rethink their dollar-haven strategy.

SUMMARY
The recovery from the recession hit a rough patch in the second quarter as several economic indicators turned soft and the stock market turned south. It’s too soon to tell if this is the start of a new leg down or simply a pause that refreshes. Either way, we continue to do our best to help you reach your goals.

Weekly Focus – Think About It

“Psychology is probably the most important factor in the market–and one that is least understood.”
–David Dreman

Best Regards,

Jeff Sorensen

(805) 379-9870

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Investment Advisor Representatives with and Securities and Investment Advisory Services offered through Transamerica Financial Advisors, Inc. (TFA) member FINRA, SIPC and a Registered Investment Advisor. Non-Securities products and services are not offered through TFA.

* This newsletter was prepared by PEAK.

LD37496-07/10

* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.* The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks.* The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. *Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

* Consult your financial professional before making any investment decision.

* You cannot invest directly in an index.

* Past performance does not guarantee future results.
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