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Market Update
|  The broad stock market, while having cooled since the end of April, remains just slightly in positive territory YTD as we approach the half-way point, with the S&P 500 up 0.86% for the year. (The NASDAQ is flat and the Dow Jones has gained 3.08%.)
Meanwhile, the Greece sovereign debt situation continues to play out in the financial headlines. The fifth and final tranche of the original Greek bailout plan has been at forefront of the most recent news events. This payment is due in July and is needed by Greece to avoid a default. However, the European Union, the European Central Bank and the International Monetary Fund are demanding that Greece pass additional fiscal reforms and austerity measures before funds are delivered. As protesters take to the streets in opposition to these difficult proposed changes, the political tensions in Greece have risen as the deadline approaches. (At the time of this writing, Greece appears to have reached a deal on a five year austerity plan, inching ever closer to a resolution.) Although Greece is one of the smaller nations that make up the European Union, a potential credit default there would have wide-ranging ramifications on both sides of the Atlantic. First, the credibility of the euro and the ability of the European Union to continue in its present configuration would likely come into question. Secondly, if a default occurred, governments, banks and other investors in Greek sovereign debt would realize either partial or full losses on their holdings depending on the scope of the event. Thirdly, the financial markets would likely be revisited by heightened volatility as speculation surrounding the credit status of other weak EU nations and the fear of contagion moved to center stage once again. The good news: it is considered likely that the upcoming July payment to Greece will be made after posturing on all sides has concluded. In that case, default will be staved off and Greece will have more time to find a solution to its complex debt problems. The bad news: many observers, former head of the Federal Reserve Alan Greenspan among them, are of the belief that some sort of default by Greece is inevitable given the numbers, be it now or down the road. The issue of sovereign debt, already a factor going back to 2010, is likely to remain a key factor influencing markets for the foreseeable future. Greece, Ireland, Italy, Portugal and Spain are the European countries already closely watched. Additionally, we expect debt levels to be a hot potato in the next U.S. presidential campaign. As we have witnessed since the beginning of last year, volatility is likely to increase whenever these credit concerns become front page news. |
The Best of Times, The Worst of Times
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The past three weeks not withstanding, for the twelve-month period ending May 31, 2011 equity investors around the world enjoyed the equivalent of blue skies and bright sunshine, while the economic news was partly cloudy at best.
Among forty-five developed and emerging-country stock markets tracked by MSCI, all but four had double-digit total returns (in US dollar terms), and twenty-six had returns of 30% or more.
If someone had told us a year ago that global markets would stage such a broad-based rally we would have been inclined to think that trends in employment, housing, and financial distress were about to take a pronounced turn for the better. Yet it seems hard to argue they have done anything of the sort. Somehow, despite gloomy financial page news that keeps repeating itself, equity prices marched substantially higher.
Here are some headlines pulled from the financial pages over the past year, while 41 of the 46 of the worlds stock markets were experiencing double-digit gains:
"Fearful Investors Are Pulling Out"
Adam Shell. USA Today, May 20, 2010
"Housing Prices Remain Weak"
Sara Murray. Wall Street Journal, May 26, 2010
"Fear Returns-How to Avoid a Double-Dip Recession" Cover story. Economist, May 29, 2010
"Discouraging Job Growth Batters Stocks"
Don Lee. Los Angeles Times, June 5, 2010
"Economic Outlook Darkens"
Jonathan Cheng and Justin Lahart. Wall Street Journal, June, 2010
"Greek Woes Fuel Fresh Fears"
Marcus Walker and Hannah Benjamin. Wall Street Journal, May 10, 2011
"Fear Wins: Stocks Resume Long Slide" Adam Shell. USA Today, June 16, 2011
"Home Market Takes a Tumble"
Nick Timiraos and Dawn Wotapka. Wall Street Journal, May 9, 2011
"The World Economy-Sticky Patch or Meltdown?" Cover story. Economist, June 18, 2011
"Jobs Data Stoke US Recovery Fears"
Robin Harding, S. Bond and M. Mackenzie. Financial Times, June 4, 2011
"Stocks Plunge Amid Fears That Global Economy is Slowing"
Christina Hauser. New York Times, June 11, 2011
"Bond Fund Managers See Signs of a Bubble"
Sam Mamudi. Wall Street Journal, June 8, 2010
"Rapid Declines Rattle Even Optimists"
E.S. Browning. Wall Street Journal, June 14, 2010
The moral of this story? In spite of the fact that the S&P 500 is down 5.75% May 31 through June 24, investors should always be skeptical of their ability to predict future events, and even more skeptical of their ability to predict how other investors will react to them.
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Milestone Financial Advisors, LLC
Ten Key Portfolio Considerations: |
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- Reduce Expenses
- Diversify Systematically
- Seek to Reduce Taxes
- Think Long Term
- Maintain Discipline
- Maintain Prudent Cash Reserve
- Own Low Cost Funds
- Maintain Asset Allocation
- Add to Portfolio Systematically
- Connect Goals to Investments
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