Half-Time Report.

July 6, 2011

'I told you' so is an immature and egoistic turn of phrase used by self-lauding simpletons. Or so I tell my sons.
That said, We told you so.
Back in May, pundits began discussing a 'soft patch' that threatened to douse the economic expansion. Possibly catalyze a brand new recession.
The public bought in. Consumer confidence dropped. As did the Dow Jones Industrial Average. From 12,512 to 11,900 in weeks. Fear was palpable.
At the time, we felt that the setback was likely due to the quake-induced production drop in Japan, coupled with the severe spring tornado activity in the Midwest. Despite a surplus of fear and loathing, key indicators continued to improve.
Now? Japan's industrial output appears to be improving. As is ours. Last week, the I.S.M. Manufacturing index jumped to 55.3, beating the forecasts of every economist who laid his best guess. Simultaneously, last week saw the stock market surge by 6%.
Core capital goods were up in May. Housing starts jumped by 3.5%. Building permits rose 8.2%. Employment? Still slow, but considering the drop in unemployment claims, a June jobs acceleration is not out of the question.
QE2 began with a bang. And like all wild parties, it ended with one, as well.
As we enter 2011's second half, let's consider the market's performance these first six months.
Year to date, the S&P 500 has returned 4.95%, a 9.90% annualized rate of return. Surprisingly, the DJIA has risen 7.09%, with many of our nation's long-slumbering industrial giants having woken up in time to lead the charge.
All along, we've been singing the praises of mid-size companies of the growth persuasion. And these companies have risen to the challenge. The S&P Midcap 400 is up 7.73% YTD, while the Midcap 400 Growth index has appreciated by 10.16%.
Small cap value has disappointed, returning only 3.31%, but its growth counterpart has returned a lovely 10.76%.
Again, when the economic engine, as well as the ability of companies to continue adding to their multiples, is called into question-quality \ growth is rewarded.
The Healthcare and Energy sectors have been high flyers, having brought investors a 12.79% and 10.40% return, respectively. Conversely, Tech and Financials have broken hearts at 2.02% and (3.76)%.
Emerging markets have largely disappointed, with the EM Index losing 0.09% YTD. Brazil and India have been especially troubling, down 5.23% and 9.75%, respectively.
Even a prime minister that would bring Hugh Hefner to blush has not slowed Italy's market, up 7.51%. And traditional rivals France and Germany have collaborated and competed to 13.05% and 12.32% respective returns, tops in the EU.
What about fixed income? No worries. Bonds attended the party, as well. The much-maligned Municipal market led the charge, returning 5.88% these last six months. Global Emerging Market debt returned 5.84%. U.S. Corporate high yield did 4.97%. Treasuries rounded out the pack, up 2.20%.
Bottom line? There may be life after QE2. The Keynesians have had their turn. $800 billion in stimulus. QE1 and QE2.
Now, the semi-unfettered marketplace, with the assistance of low interest rates, liquidity and corporate earnings growth will take a swing.
Not all sailing in the second half of the year will be smooth. But, in rough seas lie opportunities to improve one's navigation.
The United States is not Greece. We are waking up to the issues ahead. Spending will be cut. Afghanistan and Iraq will be smaller, less fiscally erosive projects moving forward. D.C. will be forced to reconcile its budget deficits. Eventually, the entitlement triumvirate of social security, Medicare and Medicaid will be corrected.
We have always been a nation of optimists. And so we will continue.
This was the nation's 236th Fourth of July. We hope that yours was enjoyable. Filled with family, friends, food, drink, and some pyrotechnics. As the Founding Fathers would have wished. Stay tuned...

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