Q2-11 Update

The S&P 500 was down 0.4% in the second quarter. Stocks, currencies and commodities moved rapidly in response to events with changing sentiment like global economic growth, Europe's debt woes, and the impact of Japan's earthquake and tsunami. An April rally of nearly 4% was followed by a collapse that lasted through mid-June, taking stocks down 7% and then all the way back in the final week. The S&P 500 finished the quarter at 1320, about where it was at the end of March.

Corporate earnings have been strong. 2011 estimates should be nearly $100 on the S&P 500. At that level we can still assign a reasonable valuation to the stock market. Earnings growth we be more challenging though. Expectations are higher and there is less potential for upside surprises.

Gross domestic product growth was 1.9% in the first quarter of 2011. Second quarter and the remainder of 2011 have low growth estimates around 2%-2.5%.

Commodities fell 6.7% in the second quarter. Crude oil slid 16% from a high hit April 29th to finish down 11% for the quarter at $95.42 punctuated by Western governments' decision to release reserves. Gold prices have stagnated since the high on May 2 at $1,556.70. It settled Thursday at $1,502.30, up 4.4% for the quarter. Wheat prices plunged 23% in the quarter, and corn is now flat for the year, down 20% from a record high in early June. Industrial commodities such as copper and cotton have bounced back from recent lows, but remain below year-to-date peaks. Silver approached the $50 mark in April but declined sharply since.

The housing sector is finding a bottom. Home prices slowed their pace of decline in April with an increase over March according to the S&P Case-Shiller 20 city index. Foreclosed properties in the pipeline to be sold will likely tamp down any marked recovery for several more quarters.

The unemployment rate was 9.2% according to the June jobs report. Jobs continue to be added in small numbers but the unemployment rate ticked up slightly.

The Federal Reserve held short term interest rates near 0%. The yield on the 10-year Treasury note swung from 3.57% in early April down to 2.87% on June 24 before climbing to 3.16% at the end of the quarter. Quantitative Easing 2 by the Fed is over. The Fed purchased $600 billion in Treasury debt in the second round of buying designed to keep the financial system flush with cash. Fixed income alternatives still offer low yields with little chance of price appreciation.

The dollar was on its own roller-coaster against the Euro trading between $1.38 and $1.49. During late May and much of June, currency markets traded with conflicting headlines about the Greek debt crisis.

May’s core consumer price index was up 1.5%. There is very little inflation. Continued large deficits may play a prominent role in the future.

Equities all over the world also moved slightly lower in the second quarter. Europe was down about 1.1%, and Japan was up 0.6%. Emerging markets were generally lower with China down over 5%, India down about 2% and Brazil down 9%.

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