The first quarter of 2010 gave investors hope that the bull run that sprang from the March 2009 stock market lows would continue. The second quarter dashed those hopes in decisive fashion. What can we expect for the remainder of the year?
The Standard & Poor's 500-stock index fell 1 percent on June 30 to finish the second quarter with a 12 percent loss (following a 4.9 percent gain in the first quarter, it was down 7.6 percent for the first half). The S&P 500 broke a four-quarter winning streak that drove the large-cap index up 47 percent. Late in the June 30 trading session, the S&P 500 hit a low at 1,028.33, the lowest price since Oct. 2, according to data compiled by Bloomberg. The market's decline in the past two weeks was prompted by the index's failure to stay above its average price in the past 200 days, which chart analysts see as a key bullish level. The broad market has lost 15.3 percent of its value since this year's high on Apr. 23.
Earnings for the S&P 500 are expected to rise 34.3 percent in the second quarter from a year earlier, with sales projected to be up 9.4 percent, according to a Bloomberg analyst survey. That would be substantially weaker than the 54 percent spike in profits and the 12 percent jump in sales in the first quarter of this year.
Recent data don't signal that the U.S. economy will continue growing at the healthy pace many people had come to expect after initially seeing gross domestic product growth of 3.2 percent for the first three months of 2010. Those hopes would appear to be slipping given successive downward revisions of the first-quarter growth rate to 3.0 percent and most recently 2.7 percent.
U.S. new home sales plunged 32.7 percent in May to a 300,000 annual pace after a downwardly revised 446,000 pace in April, while the average price fell 4.1 percent from a year earlier. The March new home sales were also revised lower. The record low rate in May was much worse than expected and more than reversed the downwardly adjusted gains in March and April that were attributed to the tax credit deadline.
The May unemployment rate of 9.7 percent was slightly above January and February's 9.69 percent level, with only 41,000 private-sector jobs created in May.
State and local governments are raising taxes and cutting spending to address near-term deficits and the federal government seems ready to allow prior tax cuts to expire at the end of 2011. That, plus a regulatory environment that's urging the financial sector to increase capital levels and reduce credit availability, while discouraging private-sector employment by not adequately addressing rising health-care costs, adds up to an overall incentive for the private sector to reduce risk, says Chris Wallis, co-manager of the Natixis Vaughan Nelson Small-Cap Value Fund (NEFJX). (The fund placed 13th in a June 2010 ranking of the top 20 U.S. diversified equity funds by Bloomberg Rankings. View the top 20 funds.)
"As a society, we're in the process of renegotiating the roles and responsibilities of the private vs. public sectors," Wallis said in an e-mail message. "That translates into lower multiples for asset prices, further reductions in leverage, and increases in savings rates."
Since it takes years to work through these issues, that will only add to the volatility and uncertainty in the capital markets, he adds. He thinks investors need to take a longer-term view and look for individual company situations where there's a specific catalyst for underlying earnings growth that can overwhelm those pressures and drive returns.
Adam Peck, co-manager of the Heartland Value Plus Fund (HRVIX) (10th in the June 2010 Bloomberg rankings), is optimistic about the U.S.
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