The Market Today

July 2009 Market Recap
Presented by Adam Brooks, Daniel Evans, & Jared Pearson

Signs of recovery fuel enthusiasm
The S&P 500 Index (S&P 500) posted far more positive than negative days in July, as investors continued to divine signs of an impending recovery from the economic tea leaves. In particular, encouraging news on housing, corporate earnings, and second-quarter gross domestic product (GDP) were notable drivers behind surging stock prices in the month’s final three weeks. But while several trends helped to fan the flames of investor excitement, other indicators—namely recent readings on employment, income, and personal consumption—may inhibit a wildfire-like spread of enthusiasm.

Remarkable resurgence
Broad stock market indices last month continued a remarkable resurgence from their dark days of March; the S&P 500 gained 7.4 percent for the month and ended July at 987.48—a level it had not exceeded since President Barack Obama’s election day on November 4, 2008. The index has now gained a hearty 46 percent from the March 9 low. The Dow Jones Industrial Average also rallied in July, climbing 8.6 percent, while the Nasdaq Composite delivered a 7.8-percent gain.

Though U.S. stocks posted appreciable gains last month, their international counterparts fared even better. The MSCI EAFE Index of developed economies rose 9 percent, while the MSCI Emerging Markets Index surged ahead 10.9 percent, as investors rallied around the belief that these less-mature countries would exhibit stronger growth characteristics and emerge more robustly from the current economic slowdown.

Fundamental improvement
Spirits were lifted domestically by conditions in the housing market, which, following three straight years of unrelenting deterioration, finally showed some signs of stabilizing. Home prices, which had fallen for 35 consecutive months according to the S&P/Case-Shiller Composite of 20 Home Price Index, actually rose 0.5 percent for the three-month period ending in May—a small but highly symbolic improvement.

Likewise, the GDP, fresh on the heels of its worst consecutive two-quarter decline since 1958, fell by 1 percent in the second quarter, per the initial government estimate. While a contraction of any magnitude is still worrisome, the decline was less than the figure predicted by consensus forecasts and a drastic improvement from the revised 6.4-percent falloff in the first quarter.

Corporate earnings surprises also provided support to rising stock prices in July. At month-end, roughly 75 percent of S&P 500 companies had exceeded analysts’ second-quarter expectations, as companies’ cost-cutting measures more than compensated for a general decline in revenues. In fact, revenues for nonfinancial companies declined 15 percent compared with the previous year. And while better-than-expected earnings in the current quarter were viewed positively by the market, cost-cutting measures can only go so far; topline revenue growth will need to pick up in order to increase earnings on a sustainable basis going forward.

Employment and consumption lag
In conjunction with an improvement in corporate revenues, it is probable that a sustainable economic recovery will require improvements in both private sector employment and personal consumption—as governmental stimulus and spending, now playing such important roles, can also go only so far. Employment statistics, similar to GDP, remained in negative territory in recent months, but the rate of decline has improved. In June, for example, the domestic economy lost 467,000 jobs, compared with peak job losses of 741,000 in January.

And though the better-than-expected 1-percent decline in GDP was heralded as a positive, the details of the report revealed that personal consumption had fallen 1.2 percent—a figure roughly twice as bad as had been expected, indicating that household balance sheets remain under pressure and that consumers may be embracing a newfound sense of thrift.

Signs of healing
As should be expected in the aftermath of a quite severe global economic shock, the road to recovery will likely be bumpy and uneven. Likewise, investors expecting portfolios to reclaim their peak values should be prepared to exercise patience—those previous high-water marks may represent unrealistic goals in the short term. Evidence abounds, however, that the healing is ongoing, and we are indeed making progress on several fronts.

Disclosure: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin.

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Adam Brooks, Daniel Evans, & Jared Pearson are financial advisers practicing at Brooks Financial Advisors, LLC, 1567 SW Chandler Ave, Suite 102, Bend, OR 97702. They offer securities and advisory services as registered representatives of Commonwealth Financial Network®, a member firm of FINRA/SIPC. Brooks Financial Advisors is a Registered Investment Adviser. They can be reached at 541-330-6411 or at brooksfinancial@bendcable.com.

Authored by John Blood, CFA, chief market strategist, at Commonwealth Financial Network.

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