Quote for the quarter. “Shut out all of your
past except that which will help you weather your tomorrows.” – Sir William
Osler
The quarter in brief. It
was an odd and volatile quarter for the investor, and a trying one for the American
economy. The economic troubles from the first quarter continued:
record-shattering oil and gasoline prices, falling real estate prices, and a
credit crisis that wouldn’t cease. Were we seeing the depths of a recession?
Would we see an upturn from here? The Dow barely averted a bear market as the
quarter drew to a close; in May and June, some economic indicators began to
subtly improve.
Domestic
economic health. In April, the markets performed extraordinarily well. The
S&P 500 had its best month in nearly 4½
years, and the S&P 500, NASDAQ and Dow Jones Industrial Average gained
between 4.5-6% for the month.1 On April 30, the Federal Reserve made its seventh interest
rate cut since September, bringing the federal funds rate down to 2.0%.2 Stock markets in Europe and Asia
posted great gains (the Nikkei 225 shot up 11%, India’s Sensex
30 11%, and the Hang Seng 13%) as oil and gas prices set or flirted with
records.3 But the consumer was feeling squeezed: oil prices
rose 12% for the month, retail gas prices began to spike, and mortgage rates
climbed back over 6%.3
In May, the Dow lost 1.4% worth of
ground while the S&P 500 and the NASDAQ respectively gained 1% and 4.5%.4 The dollar began to recover from
its fall and winter depths, and the Fed hinted that its rate-cutting measures
were coming to a halt. On the commodities front, oil futures peaked on
May 22 at a new record of $135.09 a barrel on the NYMEX; oil prices gained 13%
during May.5 Precious metals had a
down month, and many agricultural futures fell sharply. Bits of good news began
to emerge in the housing sector: new home construction and housing starts increased. The first wave of economic stimulus checks sent disposable incomes
up by 5.7% in May (the biggest one-month increase since 1975) and overall
income up 1.9%.6 Overseas, Asia’s stock markets fell 0.3% and Europe’s stock
markets 2.8%, in a month in which most of the world’s central banks considered
how to battle rising inflation.7
You’ve probably heard that this June was the worst June for
the Dow since 1930.8 Oil prices ended June at precisely $140 per barrel,
having already flirted with the $143 mark.9 America’s
housing market showed signs of increased
sales activity, if not quite recovery. The Fed left interest rates unchanged at 2% and released the
final 1Q GDP calculation: 1.0%.10 Fed chairman Ben Bernanke said interest
rates were “well positioned” and spoke of the Fed’s commitment to a “strong and
stable” dollar.11 In fact, during the second quarter, the dollar
gained 0.3% against the euro and 6.5% against the yen.12
Major
indexes. The bull run of April
gave way to the swoon of June – as the quarter ended, investors hoped for
pleasant surprises in the upcoming earnings season and a 3Q rebound. Energy
stocks performed extraordinarily well in the second quarter; financial stocks
didn’t. Note the small gain for the NASDAQ.
|
% Change
|
2Q 2008
|
Y-T-D
|
|
DJIA
|
-7.44
|
-14.44
|
|
NASDAQ
|
+0.61
|
-13.55
|
|
S&P 500
|
-3.23
|
-12.83
|
Source: CNBC.com, 6/30/0813
Indices are
unmanaged, do not incur fees or expenses, and cannot be invested into directly.
These returns do not include dividends.
Global
economic health. Policymakers
worldwide had one eye on the U.S. markets, the other on the inflationary
pressures within their own economies. The European Central Bank has long had a
2% target for inflation, so May’s 3.7% reading and June’s 4.0% reading were
cause for worry.14 In
Asia, inflation pressure remained much greater: by June, the latest figures had
inflation running at 7.7% in China and 1.5% in Japan (the
highest inflation rate in a decade).15, 16 The
inflation rate was 8.9% in Thailand (nearly quadruple what
it had been at the start of the year), 11% in Indonesia, 6.5% in Vietnam and
5.5% in South Korea.17
The European Commission reduced
its growth forecast for the EU to 2.0% in 2008 and 1.8% for 2009 (compared to
2.8% in 2007). The EC also projected 6.8% unemployment and 3.6% inflation for
2008 (a 50% rise over 2007’s 2.4% inflation.)18 Also, the Bank of
Japan cut its growth forecast for the next 12 months from 2.1% to 1.5%.19
World financial markets.
In Europe, the quarterly losses were mild; in Asia, they
were more significant. If you think what American investors went through in this
quarter was rough, you can always look at China: the Shanghai Composite index
fell 21% in 2Q 2008. The Hang Seng (Hong Kong) was
down 3.3% for the quarter, and India’s Sensex
posted a 14% decline.
The bright lights here were Japan’s Nikkei 225 (up 7.6% in the second quarter
after an 18% loss in the first quarter), Canada’s TSX (up 8.4% in 2Q), and the
MSCI Latin American Emerging Markets index (up 10% for the quarter). As
for Europe, the DAX fell 1.8% for the quarter, the FTSE 100 dropped 1.3%, and
the CAC 40 in France declined 5.8%.20
Commodities
markets. Oil
prices gained 39.9% in the second quarter. As the quarter ended, oil prices
were up 45.9% for the year. The amazement doesn’t stop there. Look at the rest
of these quarterly gains: heating oil, 37%; gasoline futures, 33.9%; diesel,
31.4%; corn, 24.5%; oats, 27.4%; soybean oil, 26.5%; soybeans and soybean meal,
32.1% and 33.6%; cocoa, 36%. Coal topped them all, with a 69.6% gain for the
quarter (at the end of 2Q 2008, Central Appalachian Coal futures were up 143.4%
for the year). Precious metals eked out gains, even with the dollar showing
renewed strength in May and June. Gold prices had gained 9.7% on
the New York Mercantile Exchange for the first quarter; for the second quarter,
they rose 0.3%. Silver went up 0.1%, copper 1.7%, platinum 1.3% and palladium
2.4%.21
Housing & interest
rates. There were some positive signs
here. New
home construction rose 8.2% in April (the biggest jump in two years), with building permits up 4.9%.22
The pace of new home sales also rose by 3.3% in April.23 Existing
home sales rose 2% in May, with the inventory of unsold homes shrinking by 1.4%
(although the median resale price 6.3% lower than in May 2007).24
The National Association of Realtors’ Pending Home Sales Index (the number of
home sale contracts signed) rose by 6.3% in April.25 However, May 2008 foreclosure filings were up 48% from May 2007 totals (according to RealtyTrac).26 Housing starts fell 3.3% in May;
building permits also declined.27
While
average interest rates on 30-year FRMs had finished the 1Q of 2008 at
5.85%, the downward trend was reversed by
quarter’s end.28 By the last week in June, 30-year
FRMs were averaging 6.45%, with 15-year FRMs
averaging 6.04%, 5-year ARMs averaging 5.99%, and 1-year ARMs averaging 5.27%.29
Second quarter outlook. Are things stabilizing, as certain
manufacturing, retail and housing indicators have hinted? Possibly.
The pessimists are looking at the stock market, inflation and oil prices and
seeing 1980 again. But it is not 1980, it is 2008, and the American economy
really looks pretty good right now in comparison to those times. The economy is
much healthier today than it was then: GDP is still in the plus column, we have
4% inflation instead of 14%, and 5.5% unemployment instead of 10%. In short,
this is not time to panic. Economists knew this year would pose some challenges
for America and for the investor; the wisdom is in riding them out, and in
taking advantage of the market rebound to come.
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The Dow Jones Industrial Average is a
price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ
Composite Index is an unmanaged, market-weighted index of all over-the-counter
common stocks traded on the National Association of Securities Dealers
Automated Quotation System. The Standard & Poor's 500 (S&P 500) is an
unmanaged group of securities considered to be representative of the stock
market in general. It is not possible to invest directly in an index. NYSE
Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock
Exchange (the "NYSE") and NYSE Arca
(formerly known as the Archipelago Exchange, or ArcaEx®,
and the Pacific Exchange). NYSE Group is a leading provider of securities
listing, trading and market data products and services. The New York Mercantile
Exchange, Inc. (NYMEX) is the world's largest physical commodity futures
exchange and the preeminent trading forum for energy and precious metals, with
trading conducted through two divisions – the NYMEX Division, home to the
energy, platinum, and palladium markets, and the COMEX Division, on which all
other metals trade. These views are those of Peter Montoya Inc., and not of
Gary Hokin and/or Nikoh Securities Corporation, and should not be construed as
investment advice. All information is believed to be from reliable sources;
however we make no representation as to its completeness or accuracy. All
economic and performance is historical and not indicative of future results.
The market indices discussed are unmanaged. Investors cannot invest in unmanaged
indices. Please consult Gary Hokin at
(847) 559-1002 for further information Additional risks are associated with
international investing, such as currency fluctuations, political and economic
instability and differences in accounting standards.
Citations.
1
cnbc.com/id/24392832
[4/30/08]
2
npr.org/templates/story/story.php?storyId=90074149 [4/30/08]
3
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4 money.cnn.com/2008/05/30/markets/markets_newyork/index.htm?postversion=2008053017 [5/30/08]
5
cnbc.com/id/24896128 [5/30/08]
6
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7
reuters.com/article/marketsNews/idINSP16663820080529?rpc=44&pageNumber=2&virtualBrandChannel=0&sp=true [5/29/08]
8
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9
money.aol.com/news/articles/_a/oil-prices-end-down-after-topping-143-a/n20080630155409990032 [6/30/08]
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11
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12
online.wsj.com/article/SB121486433371317399.html?mod=googlenews_wsj [7/1/08]
13 cnbc.com/id/25462508 [6/30/08]
14 afp.google.com/article/ALeqM5jMXyiHeARrN_DgQaHNVBqAKoPwnA [6/30/08]
15
guardian.co.uk/business/feedarticle/7619512 [6/30/08]
16 bloomberg.com/apps/news?pid=20601068&sid=a1f8isWat_mk&refer=home [6/27/08]
17
ft.com/cms/s/0/16dcce54-4796-11dd-93ca-000077b07658.html [7/1/08]
18
ec.europa.eu/economy_finance/publications/specpub_list9253.htm
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20 online.wsj.com/article/SB121485878147617067.html?mod=sphere_ts&mod=sphere_wd [7/1/08]
21 cnbc.com/id/25462493 [6/30/08]
22
usatoday.com/money/economy/housing/2008-05-16-housing-starts-gain_N.htm [5/16/08]
23
cbsnews.com/stories/2008/05/27/business/realestate/printable4128138.shtml [5/27/08]
24
reuters.com/article/reutersEdge/idUSWBT0092820080626?sp=true [6/26/08]
25 forbes.com/afxnewslimited/feeds/afx/2008/06/09/afx5095542.html [6/9/08]
26
usatoday.com/money/economy/housing/2008-06-13-foreclosures-rise_N.htm [6/13/08]
27
cnbc.com/id/25207855 [6/17/08]
28
money.cnn.com/2008/03/27/real_estate/mortgage_rates/index.htm?section=money_latest [3/27/08]
29 news.yahoo.com/s/ap/20080626/ap_on_bi_ge/mortgage_rates_3;_ylt=As9AOvQTmStCMdPAnNWIpJ2z1g4B [6/26/08]