If you have recently awoken in a cold sweat with an eerie feeling that you have been here before, you are not alone. Does it feel like "Groundhog Day'' to you? Those of you old enough might remember the classic 1993 movie starring Bill Murray, where his character kept waking up to the same day over and over again. Did the 2nd Quarter, 2010 stock market performance make you think that you kept waking up in 2008? (If you recall, during 2008 we experienced the worst market performance we have had in 75 years with the S&P 500 Index losing 37%.) The S&P 500 Index fell by 11.43% during the 2nd Quarter, turning what began as a promising start to the year into a year-to-date market loss of -6.65%.
We started the year with the best 1st Quarter the market has experienced since 1998. The S&P 500 Index was up 5.39% and, for the first time in a long time, people were starting to breath once again. Account balances surged ahead and we all believed that things were getting better. Then, all of a sudden, we woke up in 2008. Our first clue that all was not right was initiated by the "glitch" in the Dow Jones on May 6th, which caused the Dow Jones to fall by over 1,000 points in one day. This awoke the market volatility that had been hibernating for over a year. Shortly thereafter , "it" all broke loose. The real problem of this Quarter can be attributed to the 'Euro-zone debt crisis.' Greece announced it was having significant short term debt issues and was almost bankrupt. Several other countries jumped in and bailed Greece out. Shortly thereafter we learned that Greece was not alone in its short-term debt issues. Portugal and Spain were in the same boat. Other countries will likely be affected throughout 2010 and into 2011. It appears that the United States' financial woes of 2008 are now being experienced in Europe. Unfortunately, this crisis had a major affect on our market. It is clear that the international markets have a strong impact on our market domestically.
Aside from the troubled international markets affecting our domestic markets, several other issues negatively affected the 2nd Quarter market. While the unemployment rate has improved , it has done so at a snail's pace, falling to 9.5% nationally. The residential real estate market has again taken a tum for the worse with home values taking a further decrease, forcing an already soft market to remain at a standstill. Lastly, and probably the biggest factor, is that the banks have produced virtually zero lending activity. An economist who spoke at a conference I attended last week was asked why the banks were still not lending money. The reply was this: 80% of the bank write-offs have already occurred; the last 20% will take place during the remainder of 2010. Until these write-offs have concluded, we cannot expect the banks to lend money again. In 2000-02, banks were virtually giving money away to anyone regardless of their credit score. Today, the banks are not giving money away. Economists hope that when the banks do once again start lending money, they will have reasonable lending practices.
The U.S. economy and U.S. market are emerging from the "Great Recession" - the worst market performance and economy in over 75 years . Things are looking up, but it will take a long time to get back to where we once were. What we are in right now is a "Fragile Recovery" period and that should not be taken lightly.
During the 2nd Quarter, the economy expanded at a rate of 3%, making it the 4th consecutive quarter of economic growth. The bottom line — we are moving forward, but at a leisurely pace. While the market has shown great upside for small time periods, we need to remember that the market reacts on possibility , the economy reacts on certainty, and the economy makes the market, not the other way around. A market recovery does not take weeks or quarters, but years.
While I may sound like a broken record , we are preaching patience and focus on the long-term gains of the market, not short-term gains or losses. Thus far in the 3rd Quarter, the market has surged back and erased much of the 2nd quarter loss. Your retirement account is long-term, so stick with it. If we have learned anything recently, it's that your account can recover, just as it can fall.
If there is anything that we can do to help you achieve your retirement or investment goals, please do not hesitate to contact us. We appreciate your continued support of and participation in AdviseMe!® and look forward to working with you.
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