Each quarter when we write our Market Commentary, we do so by comparing the Market to recent events, popular songs, award-winning movies, etc. In analyzing the 2nd Quarter, it was quite clear that the theme had to be based on the weather. I think the meteorologists in Cleveland were right about 50% of the time. This percentage isn’t that great when they only have a 50/50 chance of rain or sun. In the Cleveland area, there was a period from the end of the 1st quarter into the 2nd quarter where it rained for 79 out of 84 days. It rained so much I started to construct an Ark and was in the process of gathering the animals two by two. As my family can attest, I am no Bob Villa, or even Bob The Builder, so we were thankful that the rain stopped, the fairways dried, and we are now having a very nice summer. The Market’s performance acted similar to our weather - we experienced year-to-date highs and then began looking for cover.
The intent of our Commentary is to summarize, in an understandable way, what has occurred in the Market and the economy and why, and then to give some ideas and guidance for what lies ahead.
So far in 2011 we have experienced several major world events: a spike in oil prices; an earthquake, tsunami and nuclear power scare in Japan; Middle East turmoil; and additional debt issues in Greece and other countries in Europe. It is amazing that, even with all of these events, we ended the 2nd Quarter with the S&P 500 Index up 6.02% YTD (BTN Research).
We will try to explain how we could weather this storm and then what we expect for the rest of the year. First, we are still in recovery mode from what analysts called “The Great Recession” which symbolized the worst Market performance we have experienced in our lifetime. We have discussed that the recovery period will take years, not just months or quarters. While some sectors such as Health Care and Energy are recovering, several sectors such as Financials continue to struggle.
One of the areas that has helped keep the Market positive is “big business”. The big businesses of America continue to have strong earnings and, while they are now much leaner in their workforce than years before, they are aiding in keeping the Market moving in the right direction. As Fortune 500 companies begin releasing their earnings, we have to also take a look at what areas continue to concern us.
The first is the unemployment rate. We nervously anticipate the monthly number coming out and we all hope that this continues to decrease. It seems as if we move in the right direction for a few months, but then take a step backwards every so often. Although the White House stated the unemployment rate would be significantly lower by now, we believe it will actually take years to get back to the numbers we were used to seeing. This is especially true when you factor in “underemployment”. Underemployment is when an individual takes a new job for which they are over-qualified. The candidate accepts the position because of the lack of openings available in his/her desired field.
Another factor to look at is the ongoing decline in the residential real estate market. We discussed in the last commentary that banks are finally “back in business” which means they are loaning money out, specifically for mortgages. Unfortunately, the housing market isn’t generating the activity that should be happening to get the economy going. For most of the country and specifically in Ohio, sellers cannot sell their homes because they owe more than its worth. So, the supply continues to be very high and the number of new construction and new home sales remains very low.
Finally, many participants have been questioning the effects of the government’s debt limit crisis. The end date for the budget is August 2nd. This situation is so important that President Obama has said that this could end his presidency. In analyzing the dynamics of this situation, there is much more going on here than meets the eye. The government has increased the debt limit 10 times in the last 10 years and 78 times in our nation’s history. So, the question you may ask is why now is there a line being drawn in the sand? Unfortunately, there is not an easy answer except that it is politics and each politician has his/her own agenda.
We want you to take away that there are positive aspects to our economic recovery and to the Market but a lot of issues still remain on this road to recovery. We have started to hear those two words that seem to pop up when we start to encounter volatility and continued concern with inflation and real estate – “double dip” recession. Our feeling is that while recent economic trends have been disappointing, and the odds of a recession have risen, the most likely outlook is continued, sustained, sluggish economic recovery.
So, what should you do as a participant with your account? As we have stated in the past, this is your retirement account and it is based on the long term. The S&P 500 Index has a 50-year growth of 9.7% per year. Even though we have battled through wars, natural disasters, recessions and terrorism, the Market still averaged a growth rate of almost 10% per year. As a participant, it is important to make sure your investment selections are diversified and match your risk tolerance and time horizon.
If you are feeling concerned about current market events, we encourage you to review your investments especially if you have not done so for a while. While the Market has not come all the way back to its high point of October of 2007, your account should be at a relatively high point and, if you are considering making a change or reducing the risk, now is the time to do so.
If you have questions regarding your financial situation or your investments, please do not hesitate to contact me directly at (216) 595-0700.