Q2-09 Update

The stock market rally that started in March continued through May and helped the S&P 500 rise 15% in the second quarter. This is the first quarterly increase in a year and a half and even pushed the index into positive territory for the year to date.

Investors are slowly becoming more comfortable with riskier assets as credit conditions improve or are at least “less bad”. Markets shrugged off bankruptcies from the likes of General Motors and many companies including financial institutions like Bank of America were able to raise capital needed to shore up balance sheets.

Corporate earnings for the first quarter were down but did generally come in better than anticipated. Second quarter earnings are expected to be about 35% lower than 2008. Companies are not forecasting year-over year improvement until the fourth quarter when comparisons to last year get much easier. If companies are able to meet or even exceed expectations and pronounce confidence in their ability to grow profits, markets can move higher. If corporations can not improve on profitability, the stock market may move back down.

Final gross domestic product growth was down 5.5% in the first quarter of 2009. Another decline is expected for the second quarter. Impacts of various stimulus programs take a few quarters to show up. They may buy time for the economy to turn around.

Commodities improved as signs that economic declines especially in emerging markets were less dire. Rising fuel and food prices combined with continuing inflation concerns in the US spurred investors to buy commodities as a hedge. Commodities in general were up 12% in the second quarter. Crude oil rose 41% to close at almost $70 per barrel. Gold was flat but other metals like copper were up sharply. Agriculture was up slightly and livestock was lower.

Home prices nationwide have declined about 33% from the 2006 highs. While prices may still have room to fall there are signs of stabilization. April’s decline from the month earlier was 0.6%.

Retail sales are moving lower than last year. Rising unemployment and positive savings rates against last summer’s federal tax rebate checks ensure declining year-year sales figures.

The unemployment rate rose to 9.5%. Another 467,000 jobs were lost in June. This was a disappointing result since it was more than the previous month’s loss. The recession has now claimed over 7 million jobs and weak job market expectations remain.

The Federal Reserve maintained the 0.00% to 0.25% range for federal funds. The yield on 10-year Treasury Notes did rise from last quarter’s very low level to 3.52%. The Fed does not seem to be concerned about inflation at this point. With the core consumer price index at 1.8% in May, inflation remains under control for now.

Equities all over the world increased in the second quarter. The more volatile emerging markets like China (+25%) and Brazil (+26%) were up more than other developed markets like the United Kingdom (+8%). Again most equities moved in the same direction suggesting potential that a global economic recovery is forming.

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

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