Second Quarter started out much better for stocks. By May, the DJIA had actually risen 8% from the end of First Quarter. Unfortunately, stocks were unable to hold onto their gains and retreated back below their First Quarter lows. At the end of Second Quarter, large stocks in the DJIA and S&P 500 had lost 13.3% and 12.0%
respectively from the beginning of the year. Small stocks in the Russell 2000 Index have trimmed their losses to 9.4%. International stocks in the DJ World (ex US) Index ended the quarter with a year-to-date loss of 11.0% .

Continued talk of a recession is weighing heavily on investors minds. Consumer confidence reached a 16 year low in May and was even lower in June. Unemployment jumped to 5.5% in May. Oil prices reached new highs above $140 a barrel and corn prices were more than $8 a bushel on future contracts. The financial sector continues to struggle and the housing market is still hurting.

However, consumers actions are not consistent with a looming recession. Retail sales for the three months ended in May grew at an annualized rate of 12.1% - the highest rate in two years. In addition, a poll conducted by Pew Research Center found that 52% of Americans say they can “afford what they want” compared to 39% in 1992. This contradiction may be because Americans’ wages are also higher and most havekept their jobs. In May, personal income was up 1.9% and was 6.4% higher than last year. The increase in unemployment was primarily in the 16 –24 years age group, not the 25 years and older which according to
economist Brian Wesbury, could mean that the government misjudged the seasonal adjustment needed at graduation time.

First quarter GDP was a positive 1.0%. A Merrill Lynch survey of fund managers shows that 70% believe a
recession in the next 12 months is unlikely. Economist Ed Yardeni continues to believe that if we have a
recession, it would be short and shallow. However, most analysts and economists agree that even if we
don’t technically have a recession, growth will continue to be sluggish and lower than average.

The Federal Reserve cut interest rates by a mere 0.25% in this quarter and left rates unchanged at the most recent meeting. Although they highlighted inflation concerns causing some analysts to believe they will raise rates by year-end, many analysts, including BCA Research, do not believe this will happen unless the financial markets and housing markets have stabilized. In anticipation of future rate hikes, bond yields have moved higher. The yield on the 10-year Treasury bond has risen from 3.4% to 4.0% during the quarter. FDIC insured CDs with an 18-month maturity are paying the same 4% as the 10-year Treasury making them an attractive shortterm alternative.