During the second quarter, the economy showed marginal signs of improvement; however, gains in the stock market were tempered over the last few weeks of the quarter by lingering fears of a slowing recovery. It is still too early to say whether Bernanke’s "green shoots" are bearing fruit yet.
Some important events include Chrysler filing for Chapter 11 bankruptcy in late April followed shortly thereafter by General Motors in early June. Both bankruptcy plans were engineered by the federal government. GM’s filing is the largest bankruptcy by an industrial company and the fourth largest in history.
The U.S. shed 345,000 jobs in May, which is a substantial number but below the 504,000 and 652,000 jobs lost in April and March, respectively. The unemployment rate also increased to 9.4% in May, its highest level since July 1983.
Despite this, the economy may get a boost from increasing consumer confidence. In May, the Consumer Confidence Index jumped to 54.9 from 40.8 in April. This is the highest level since last September but still short of the 58.1 level a year ago. While there is still a long way to go before we return to normal, higher confidence levels could help strengthen consumer spending, which accounts for almost 70% of the U.S. gross domestic product.
When the second quarter began, stocks were three weeks into a rally that would continue almost unabated for another two months. At the end of 2Q09, the stock market experienced its first quarterly gain in 18 months and its best overall quarter since 2003. Despite this, U.S. equities are still mostly flat for the year. The Dow Jones Industrial Average returned 11.96% for the quarter but is still down 2.01% year-to-date. The S&P 500 Index is up 3.16% year-to-date due to a 15.93% gain during the quarter.
While the domestic equity markets saw substantial gains for the quarter, international and emerging markets were clear winners. Global markets were boosted by optimism surrounding a global economic recovery. The broad international markets, as measured by the MSCI EAFE Index, gained 25.43% for the quarter (up 7.95% year-to-date). The MSCI Emerging Markets Index gained 33.57% in the second quarter (up 34.26% for the year). However, since the June 1st high in emerging markets, the index has turned lower in the wake of talks that a global recovery might be premature.
The fixed income markets had a good quarter as well, as credit spreads narrowed significantly, resulting in strong gains for domestic corporate bonds and high-yield bonds in particular. This was a dramatic move that has substantially reduced the borrowing costs for companies. High-yield spreads narrowed by more than 500 basis points (bps) to roughly 950 bps, and corporate spreads tightened from 500 bps to just under 300 bps. Spreads are the premium companies must pay, relative to U.S. Treasuries, in order to borrow money in the capital markets.
High-yield bonds gained 26.72% for the quarter and 30.43% for the year, as measured by the Barclays Capital High Yield Index. Corporate bonds were up 10.45% for the quarter and 8.32% for the year, as measured by the Barclays Capital U.S. Investment Grade Corporate Bond Index. Municipal bonds also gained during the quarter, as supply in tax-free bonds was squeezed by the issuance of the Build America Bonds. The Barclays Capital Municipal Bond Index returned 2.11% for the quarter, leaving it higher by 6.42% for the year. Returns on short-term U.S. Treasuries remained flat, posting a -0.16% and 0.00% return for the quarter and year-to-date, respectively, as measured by the Barclays Capital 1-3 Year US Treasury Index.
Many investors who have been on the sidelines may be concerned that they have missed the rally, prompting them to consider re-entering the markets at these higher levels. This reactionary posture can lead to a classic mistake many investors make – to sell at market lows and buy after markets move higher. Now, more than ever, it is critical to stay the course and continue to execute your investment policy to weather these still uncertain times.