The Calendar Midpoint... And Where To Now?

At the close of the stock market bell on June 30 it signaled the worst quarter of performance since December 2008. The major market indexes reflected by the Dow Jones Industrial Average, the Nasdaq, and the S&P 500 all indicated double digit negative returns wiping out the first quarter gains. Accordingly, year to date returns were -6.34% for the Dow, -7.05% for the Nasdaq, and -7.57% for the S&P 500.

So as all the golfers out there would say we are heading into the back nine holes and since the first nine wasn’t too good we would like to think it’s a new beginning. But can it be with the economic and global market overhang that appears to be lingering. In a Harris Poll, which was released about a week before this writing, only 30% of adults expect the economy to strengthen over the next year, 28% believe it will get worse, and 42% feel it will stay the same. Not exactly an overwhelming vote of confidence from the American consumer.

The concern, certainly, is that economic growth is faltering and indeed there are a number of indications that support that assumption. While second quarter growth numbers are not available at this time, the first quarter came in at 2.7% which was less than half of the fourth quarters 5.6%. Economist’s expectations are not high for the eventual second quarter figures. The latest unemployment report gave enough indication that the pace of the U.S. economic recovery shows signs of slowing. Modest hiring in the private sector was a disappointing 83,000 in June versus a previous expectation of 115,000. Further, analysts believe that the private sector needs to achieve new hires of at least 150,000 per month to put any kind of dent into the unemployment rate. Interestingly, the rate did drop to 9.5% in June but that was not particularly good news given that 652,000 dropped out of the workforce for reasons that include sheer frustration of trying to find a job.

The housing market shows signs of renewed sluggishness probably exacerbated by the expiration of the housing credits. A newsworthy item heard today was that mortgage applications have continued to drop in number for the eighth week in a row. The reality of the housing marketclearly has to be that a significant upturn in the market cannot take place until there is a serious reduction in unemployment which can begin to renew a sense of confidence on the part of the American household. A corollary to the housing markets is the fragile condition of many state, city, and municipal finances. Budget slashing considering such measures as rolling back pensions of public employees, cutting services like police, and reducing education funding are but some of the actions under review.

On the global front there continues to be investor concern that a broader bailout plan may still be required before the European debt crisis can be considered to be in check. While much of the attention is directed to the PIIGS (Portugal, Ireland, Italy, Greece, and Spain), other countries such as the United Kingdom have experienced spiraling deficits that put their credit ratings at risk. The implementation of austerity measures at these sovereign levels will probably impact growth opportunity in the global markets.

Our domestic markets will have mid term elections to look forward to in November this year which should prove quite interesting. At the end of June, estimates suggest that there can be 17 senate seats and 114 house seats up for grabs and don’t discount the influence of the Tea Party movement. Their mantra is to push for outsiders to get inside the Washington beltway rather than see incumbents returned. While the Democratic party probably has more to lose at this point, the Republicans will not be without their share of “victims.”

The short term market catalyst will be the onset of quarterly earnings season that should begin about a week from the point of this writing. The buzz in the marketplace is that companies and securities analysts may begin cutting third quarter forecasts with the expectation of a slowdown in GDP growth both in the U.S. and overseas. If actual reported second quarter earnings are missed, versus expectation, this could truly be enough to scare the market, resulting in a sharp selloff.

So again, for our golf friends, let’s hope that we just take that mulligan (basically a do over for the non golfers!) early in the second half of this year and hope that something good surfaces as a catalyst to create a turnaround in the markets.