We understand the anxiety of hearing economic concerns in the news every day, and the all too familiar fears it can elicit, given what happened in our economy just a few years ago. Recent economic turbulence, cited in headlines and talking points daily, has certainly rubbed off on the stock market. Although still positive for 2011, as of June 20th, the S&P 500 Index was down -4.86% for the month of June, after being down -1.13% for the month of May. Nonetheless, in the quarter to date, our balanced portfolios are holding up better, as bonds have made nice forward progress since the end of March.

With this in mind, we would like to address the global economic situation and the concerns surrounding it. While we are not diminishing the significance of this worrisome situation, for now we continue to believe that the US economy has hit a soft patch, from which it will improve slowly.  We are prepared to adjust our thinking and make appropriate changes in client portfolios if deemed necessary, but we remain cautiously optimistic about the trajectory of the markets.

Looking abroad, there have been continual worries about Greece’s ability to emerge from its year-long battle with a debt crisis. Amidst bailout installments from the International Monetary Fund, the country is still projected to fall short of its debt obligations for the next year. Germany and France, key countries in the European Union, are feeling pressure to fill in such gaps, but their finance ministers are wary to deliver further bailout payments until Greece proves itself to be making serious reform efforts and spending cuts. Investors aware of the prospects for Greece defaulting are leery of the contagion that could spread to other countries and adversely affect global financial markets. Additionally, China and Latin America are experiencing commodity driven inflation and are tightening monetary policy, further adding to the global worries.  Although the situation in Greece is a difficult one, we believe a resolution is on the horizon, most likely with the involvement of the private sector for a second bailout, and that China and Latin America will reaccelerate somewhat in the second half of the year. 

This tenuous predicament internationally accompanies fragile fundamentals that already exist in the United States. The unemployment rate rose slightly from 9.0% in April to 9.1% in May. An improvement in jobs is crucial to a stronger US economy. We believe our domestic economy will continue to grow, albeit gradually, and pick up where it left off in the first quarter with decreased unemployment and rallying stocks.

There is also some concern about the planned June end date of QE2, the Federal Reserve’s Quantitative Easing initiative. The Federal Reserve agreed to buy $600 billion worth of US Treasury securities from investors to add liquidity to the capital markets to keep interest rates low and provide the impetus to investors to invest and consume, and as a result, hopefully boost the economy. There is worry among some that the stock market will suffer as this support from the Fed ends. However, we believe what many experts are saying—that the end of QE2 will not bring with it much disruption, as investors have already priced that in and the market reflects it.

We are looking ahead with the expectation that the economy will continue to muddle along, with slow, but steady growth. We are confident that there are opportunities to be capitalized on in stocks, and with vigilant optimism, we will move forward through this soft patch. As always, please call your portfolio manager if you have questions or wish to discuss any of this further.