After a strong showing in the first quarter the market declined in April and May, but recovered in June so that the S&P 500 is up by 5% for the year to date. Investors have had to deal with all the negative headlines about the problems in Europe, the U.S. hanging on the edge of recession, the slow-down in China, the ramifications of the health care bill, Dodd-Frank, the prospect of higher taxes, and the November elections. Fundamentals matter, but, as we have repeatedly said, over the short-term, expectations and investor sentiment drive markets.
Decisions reached at the EU summit in Brussels at the end of June lived up to low expectations that leaders will take short-term steps to deal with the crisis. As in the past 20 summits over the last three years, the leaders have set forth restructuring plans, but big political, fiscal and monetary hurdles remain before a fiscal, monetary and banking union can be achieved. Hopes were raised by a relatively favorable election in Greece where pro-euro candidates were elected. Progress may actually have been made with agreement on the new permanent ESM (European Stability Mechanism) under which funds could be made available more rapidly and directly to banks, and proposals to scale back the extent of the previously prescribed austerity measures. There seems to be a growing willingness to believe that Europe’s crisis will be eventually resolved, but with costs that will be enormous for all parties concerned.
Reported economic data in the U.S., Europe and Asia has been soft with declines reported for GDP, manufacturing, employment, housing, and business investment. Reported S&P 500 earnings may show a decline for the second quarter on a year-over-year basis for the first time in three years, but are still headed for a record $103 for the year. With continuing weakness in economic reports, there are widespread expectations that the Fed and other central banks will act with more quantitative easing in an attempt to revive their struggling economies.
Partnering with clients, Whitnell advisors make allocations for investment to various asset classes, countries, companies and other securities on the basis of an assessment of the factors that contribute to returns including financial strength, growth, and, most importantly, valuations, to achieve client objectives.
Our perspective is that stocks are selling at reasonable prices and are attractive relative to historic valuations and other asset classes. To achieve the financial objectives of capital preservation and real growth, most clients will require a significant allocation to be made to stocks or other equity funds. Equity investments have produced significant returns relative to other assets over time, but come with an exposure to the risks associated with ownership and a willingness to accept inherent short-term volatility in the market place.
Over the last three years investors have shown how risk-averse they have become by reallocating assets from equities into bonds. With current low returns on U.S. Treasuries, corporate bonds, and municipals for all maturities at historic lows, an allocation to fixed income securities should be based on client long-term objectives with recognition that bond and stock prices can be volatile.
Note: We have gathered the information contained in this report from sources we believe reliable; however, we do not guarantee the accuracy or completeness of such information. You should not assume that any discussion or information contained in this market commentary serves as the receipt of or as a substitute for personalized investment advice from Whitnell & Co. No part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission.