2nd Quarter 2012 Market Update By: Gabriel PotterMBA, AIFA® 2012.07.05

Key Economic Indicators

In the second quarter of 2012, we perfectly reversed from the first quarter’s “risk-on” environment to a “risk-off” environment.  Macroeconomic forces continue to have a greater impact on the markets rather than company specific, fundamentally oriented stories.  The quarter started poorly with Greek elections reintroducing uncertainty into the scope of the bailouts and the ability of that country to cope with painful austerity measures.  Additional bailouts for Spanish banks and the Cyprus government continue to rile the stability of the Eurozone. 

Unemployment signals are less positive for the 2nd quarter.  From April to May, unemployment grew marginally worse (from 8.1% to 8.2%).  Consumer confidence declines to a 5 month low.

Equities

The equity markets were driven by fears in the Eurozone debt crisis.  Further, China still depends on its trading partners (Europe and the US) to export goods and does not have robust domestic consumption, so trouble in the developed markets impact emerging markets as well.

All index performance values (below) are for the 2nd quarter of 2012.

  • Large Cap Growth - Russell 1000 Growth:  -4.02%
  • Large Cap Value - Russell 1000 Value:  -2.20%
  • Small Cap Growth - Russell 2000 Growth:   -3.94%
  • Small Cap Value - Russell 2000 Value:   -3.01%
  • Developed International Markets:    -7.13% 
  • Emerging Markets - MSCI EM:  -8.89%

Bonds

Bond returns outperformed as nervous investors continue to pool money into the relative safe haven of fixed income assets.  Interest-rate driven debt (e.g. - governments) outperformed Credit debt because the 2Q economic weakness suggests a delay in the rise of interest rates.  That delay most benefits the longest duration debt, which soundly outperformed other asset classes.  Mutual fund flows have consistently demonstrated high inflows into fixed income assets.

  • Barclays Aggregate Bond: 2.06%
  • Bank of America/Merrill Lynch High Yield: 1.81%
  • Barclays Capital US Intermediate Credit: 1.53%
  • Barclays Capital US Government:  2.63%
  • Barclays Capital US Gov’t/Credit Long Duration:  7.32%

Alternatives

Pullbacks in expectations of conflict in Iran and increased expectation of a slowdown in growth pulled back on energy prices, putting a drag on key commodities.  Hedge fund data for June is not yet available, but was trading directionally through May.

  • Real Estate - FTSE NAREIT All REIT:  4.55%
  • Commodities - DJ UBS Commodities:  -4.55%
  • Inflation – Barclays US TIPS:  3.15%
  • Hedge Funds – DJ Credit Suisse Hedge Fund:  -1.37%
Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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