Financial Market & Economic Overview
Asset Allocation Team
Edge Asset Management, Inc.
June 2010
After Lengthy Rally, Stocks Shift Direction
Following four consecutive positive quarters, both U.S. and international stocks fell in the second quarter of 2010. The rally ended as investor concerns mounted regarding the economic stability in Europe, slowing growth in China, and the sustainability of the U.S. recovery.1
Europe's troubles, which started with the revelation of Greece's staggering budget deficit and debt load, broadened as it became apparent that other countries (such as Spain and Portugal) faced similar issues. Markets reacted negatively to the exposure of European banks to the sovereign and corporate debt of these countries, despite the nearly $1 trillion bailout plan put in effect by the European Union and International Monetary Fund. In China, the government's decision to reign in real estate growth weighed on international investors, as did new data indicating a slowdown in China's pace of economic growth.2
A Sputtering U.S. Recovery?
Negative economic data reported during the quarter pointed to slowing growth across the U.S. economy:
- Employers continued their reluctance to add staff. May payrolls were meager, following gains in March and April.3
- Gross Domestic Product (GDP) for the first quarter came in lower than expected. The 2.7% gain was a sharp drop from the 5.6% increase for fourth quarter 2009.4
- After rising for three consecutive months, consumer confidence fell unexpectedly in June, reflecting consumers' uncertainty about jobs and income.5
- Following expiration of the home buyer tax credit in April, new-home sales fell in May to a seasonally adjusted annual rate of 300,000 (the lowest number since the government began tracking the figure in 1963).6 Meanwhile, existing-home sales fell 2.2% in May after gaining 8.0% in April.7
After its June meeting, the Federal Reserve reaffirmed its belief that economic recovery is proceeding, but also acknowledged that "financial conditions have become less supportive of economic growth…" and restated its intention to keep the federal funds rate very low "for an extended period."8
Looking Ahead
The downside risk to growth clearly has risen recently, and our forecast for U.S. growth has moved downward as well, to 3.0% for 2010 and 3.1% for 2011. We also expect consumer spending to grow at a modest rate (2.0% to 2.5%) as the household savings rate slowly rises to 5% or higher. Over the next few years, we see U.S. growth spurred by the following: pent-up demand for capital spending, an increase in net exports as emerging markets continue to rapidly grow, a slow pace of inventory accumulation, and modest consumer spending. However, we also recognize unemployment to be a key headwind and anticipate that the unemployment rate will be at about 9.3% at year-end, which is higher than desired.1
1 On the Other Hand: Economic Insights, Second Quarter 2010, by Bob Baur and the Principal Global Investors Economic Committee.
2 The Conference Board Leading Economic Index® (LEI) for China, measuring economic activity, increased 0.3% in April following increases of 1.2% in March and 0.4% in February.
3 U.S. Bureau of Labor Statistics: Employment Situation Summary 6/4/2010.
4 Bureau of Economic Analysis, U.S. Dept of Commerce.
5 www.conference-board.org.
6 National Association of Home Builders.
7 National Association of Realtors.
8 Federal Reserve press release dated 6/23/10.
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