Wealth Management

Market Review - Second Quarter 2009

Investors finally had a reason to celebrate as the second quarter came to a close. All of the major averages reversed a first quarter slide and ended the quarter with significant gains. Most of the major indices posted their best performance since 2003. Domestic stocks did well, but the highest returns were generated by the international and emerging market sectors. Investors were betting that lower borrowing costs would lead to a global recovery that would lead to higher growth worldwide. Looking at the numbers, the Dow Jones Industrial Average closed up more than 11% for the quarter, with investors believing that larger companies will be the major beneficiaries of an economic recovery package. The S&P 500 index turned in a positive return of almost 16% for the last three months. Financial stocks, which held back the index in the last quarter, added significantly to its performance this quarter, due to a better showing in the banking sector. Technology stocks helped the NASDAQ Composite turn in an impressive gain of over 20% for the second quarter. Benefiting from the strength in foreign markets, the Morgan Stanley EAFA International Index was the clear winner posting a 25% return for the last quarter.

Investors are still not in agreement as to what the future holds, however buyers did outnumber sellers this past quarter. Bullish investors continued looking for more signs of an economic recovery, while bearish investors pointed to a consumer that was struggling to hang on. The answer may lie with future employment reports, which could dictate the trend of the market as we move forward. The news to date has been disappointing and weak as far as employment is concerned. Lay-offs and bankruptcies have many individuals looking for work. Our country is experiencing one of the most severe employment slumps in history. The unemployment rate is expected to rise above the 10% level, and we are close to experiencing two full years of negative monthly jobs reports. Optimists will point to the fact that employment trends are a lagging indicator, and do not begin to show signs of improving until the economy is on its way to recovering. One thing is certain, without an improving jobs picture, it will be difficult for the market to move higher. Aside from the jobs picture, maybe a good way to put it is that the bad news is getting better. This could point to good news emerging as we enter the second half of the year.

Other factors that will continue influencing the markets are the effectiveness of the government stimulus package, concerns over inflation as more money is pumped into our system, and of course we will quickly be entering another earnings reporting season. There is an old adage that the market climbs a wall of worry. We can only hope that it holds true this time around.

Looking ahead to the second half of the year, our view is that the market will initially need to digest more negative news. Positive economic news should slowly emerge during the second half of the year leading to an upward trend in the stock market. We will see corrections, but view them more as an entry point to selectively purchase companies at attractive valuations.

Michael S. Kiceluk, Chief Investment Officer (mkiceluk@capecodfive.com)
Edward R. Eastman, III, Senior Investment Officer (neastman@capecodfive.com)
Rachael Aiken, CFP, Senior Investment Officer (raiken@capecodfive.com)

The facts and opinions presented herein are provided solely for the information of Cape Cod Five Trust and Asset Management clients. The information presented has been compiled from sources believed to be reliable and accurate, but we do not warrant its accuracy or completeness and will not be liable for any loss or damage caused by reliance thereon.

Investments are NOT FDIC INSURED, NOT DIF INSURED, NOT BANK GUARANTEED and MAY LOSE VALUE.