The stock market got off to a good start after a poor showing in the first quarter. After almost getting back to even for the year by the middle of June, the S&P 500 sold off to close the quarter down 3.2%. A good start to the quarter was knoched down over the past few weeks. There could be more downside to stocks. The Dow and S&P 500 reached bear market (20% decline from most recent high) levels in early July. Still, the alternatives are poor. Safe fixed income investments have low yields and little opportunity to appreciate in value. Relief in oil prices could get a rally started in the stock market. This will likley be the biggest issue over the next several months through the Presidential election.
The price of crude oil increased 38% to more than $140 per barrel. The relentless increase is a threat to economic growth, potential cause of rising inflation, and discourages consumer purchases of other goods and services. Despite the volatility in commodity prices, inflation remains largely contained. The core rate of growth which excludes food and energy was up only 2.3% in May.
The Federal Reserve cut short term rates 2.25% to 2.00% in April and made no change at the June meeting. Crisis conditions in the financial sector that began last summer may have peaked with the Bear Stearns collapse earlier this year. There is now some expectation that the Fed can raise rates later this year to combat inflation. The yield on 10-year Treasury Notes closed the quarter at 3.97%.
Recession concerns linger amid declining corporate profits and slow gross domestic product growth. Corporate earnings growth rates were down in the first quarter and are expected to post declines in the second quarter as well. This will mark the fourth straight negative quarter. Gross domestic product was again up slightly (1.0%) in the first quarter. This was a bit of a surprise as the expectations called for it to turn negative.
After 6 consecutive months of job losses, the unemployment rate jumped to 5.5%. Retail sales, however did increase likely as a result of the government stimulus payments.
International equity markets were down too. The Dow Jones World Index (excluding the U.S.) fell with the US in the second quarter. There were areas of strength like Canada, Russia, Japan, and Brazil offset by continued weakness in Europe and most emerging economies including China and India.
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