Q2-12 Update

The S&P 500 was down 3.3% in the second quarter of 2012. There was more volatility than the first quarter with 22 days of triple digit moves in the Dow (there were six in the first quarter). Financial markets seem to have gotten another reprieve from worries about Europe. Pessimistic expectations have been exceeded as European leaders delivered more steps toward fiscal responsibility. Attention is now turning back to the U.S. Investors are anticipating the elections and the year-end expiration of tax cuts and economic stimulus that could drive the U.S. economy.

Corporate earnings continue to support stock prices. Companies in the S&P 500 are growing profits. Low earnings growth rates are expected for rest of the year. The S&P 500 finished the second quarter at a below-average price-to-earnings ratio of roughly 13, (based on expected earnings for the next 12 months).

Gross domestic product growth was 1.9% in the first quarter of 2012 (data released 06/28/2012). Projections for 2012 call for low growth of 1.9%-2.4%. The Index of Leading Economic Indicators(which includes car sales, housing starts, bank lending, and personal income) rose in May after a slight decline in April. This key metric has increased in six out of the last seven months.

Commodities(measured by Dow Jones-UBS commodity index) fell 4.6% in the second quarter. Oil was down 18%, and gold slid 4%.

The housing sector is posting intermittent encouraging signs. April average home prices increased 1.3% over March. Still showing year-year declines of about 2% according to the Case-Shiller Home Price Index released June 26th.

The unemployment rate remained at 8.2% according to the June jobs report. Job formation slowed in the second quarter with about 225,000 added. A softening job market is likely to affect election campaigns and influence the Federal Reserve.

The Federal Reserve held short term interest rates near 0%. The Fed continued to predict near zero interest rates through late 2014. Officials last month lowered their economic-growth projections for this year. The yield on the 10-year Treasury notefinished the quarter lower at 1.66% as investors continue to buy the perceived safety of U.S. government bonds.

Inflation remains low. May’s core consumer priceindex(released 06/14/12) shows a 12-month rate of 2.3%. Employment and deficits may play a prominent role in the future.

Stocks were down all over the world. Developed markets were down about 7% and emerging-markets lost about 8% in the second quarter.

Please let us know if you would like additional information on any of the above.

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