Our Writings

May 2011 Monthly Recap

Equities- Another Greek Tragedy?

Equities spent much of May in a gradual but relentless decline that reversed much of April’s strong gains. Investors concerned about slowing economic growth rediscovered risk aversion, punishing the Global Dow and the small caps of the Russell 2000 the most. After surmounting the 1300-1340 trading range where it had been since February, the S&P 500 had trouble staying there until May’s last trading day, while the tech-heavy Nasdaq regained dominance over the Dow (at least for the month). Concern about Greece’s ability to avoid restructuring of its debt helped send bond buyers into the reassuring arms of U.S. Treasuries. A sell-off in commodities at one point brought oil prices back below $100 per barrel, gold below $1,500 an ounce, and silver prices down more than 20%, though all had partly rebounded by month’s end.

Market/Index 2010 Close Prior Month As of 5/31 Month Change YTD Change
DJIA 11577.51 12810.54 12569.79 -1.88% 8.57%
NASDAQ 2652.87 2873.54 2835.30 -1.33% 6.88%
S&P 500 1257.64 1363.61 1345.20 -1.35% 6.96%
Russell 2000 783.65 865.29 848.30 -1.96% 8.25%
Global Dow 2087.44 2255.22 2178.04 -3.42% 4.34%
Fed. Funds .25% .25% .25% 0 bps 0 bps
10-year Treasuries 3.30% 3.32% 3.05% -27 bps -25 bps

Additional Market Information

The Month in Review

  • The Bureau of Economic Analysis said that economic growth slowed during the first quarter from 3.1% in Q4 to 1.8%. Despite 244,000 new jobs, the unemployment rate edged upward to 9%, according to the Bureau of Labor Statistics (BLS).
  • Higher food and energy costs pushed up the annual consumer inflation rate to 3.2%–the highest level since October 2008, according to the BLS–and wholesale prices rose 6.8% from a year ago. Energy prices also resulted in the highest monthly U.S. trade deficit since June of last year.
  • Uncertainty about Greece’s fate was aggravated by the arrest and resignation of the head of the International Monetary Fund, a key component of the European Union’s bailout mechanism. Reports that Greece’s austerity measures weren’t sufficient didn’t help; neither did the European Central Bank’s warning that any attempt to restructure the country’s debt could have dire consequences.
  • The Federal Reserve laid out its game plan for unwinding quantitative easing by the end of June as scheduled. Before it begins raising short-term interest rates post QE2, the Fed will first stop reinvesting the proceeds of maturing holdings into Treasury bonds.
  • The housing market continued to suffer. Both new home sales and housing starts were down almost 24% from the same time last year, sales of existing homes dropped nearly 13% over the year, and home prices experienced a double-dip downturn when the Standard & Poor’s/Case-Shiller index returned to 2002 levels.
  • The U.S. hit the current $1.4 trillion ceiling on the level of debt the Treasury may issue to pay the nation’s existing bills. A series of accounting measures, including a decision to halt investments in two federal employee pension funds, may buy time for Congress to come to some agreement on whether to raise the debt limit.
Eye on the Month Ahead (June 2011)

Investors who sold in May and went away will get to see whether they guessed right as the Fed heads into the last month of its QE2 bond purchases; the rest will be trying to gauge how well the economy will fare without that support. Europe’s ongoing dilemma about its weaker members’ finances will reinforce concerns about the impact of potential debt restructuring on foreign banks.

Key dates and data releases: auto sales, manufacturing, construction spending (6/1); productivity/labor costs (6/2); unemployment/payrolls, services sector (6/3); consumer credit (6/7); Federal Reserve “beige book” (6/8); international trade (6/9); import/export prices, Treasury budget (6/10); wholesale inflation, retail sales (6/14); consumer inflation, industrial production, international capital flows (6/15); housing starts (6/16); quadruple witching options expiration, leading economic indicators (6/17); home resales (6/21); Federal Reserve Open Market committee announcement (6/22); new home sales (6/23); final Q1 gross domestic product (GDP), durable goods orders, corporate profits (6/24); personal income/spending (6/27); home prices (6/28).

Source: Broadridge Financial Solutions, Inc.

401(k) Corner

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