As we enter the latter half of the third quarter the expected norm of a quiet summer has been turned around as July proved to be an exciting month on both the economic and market fronts. Through July 31, the S&P 500 Index rose nearly 50% from its low point in early March. July marked the 5th consecutive month of positive returns following declines in January and February. The mid-summer run could be attributed in part to stronger than expected earnings numbers combined with continuous economic reports that indicate the recession may be nearing an end. 

Economists were pleasantly surprised as preliminary second quarter GDP decreased at an annual rate of 1%, which significantly beat expectations. This is compared to a first quarter decrease of 6.4%. The second quarter improvement is primarily attributed to much smaller decreases in exports and private company reinvestment, as well as increases in federal, state and local government spending. Additionally imports, which are a reduction in GDP, decreased in the second quarter.

Housing starts and new home sales have continued to rise, indicating that the decline in housing markets may have bottomed out. Existing home sales increased for the third consecutive month in June (3.6%), and The Case-Shiller Index (an index of home prices in 20 major cities) registered its first monthly increase (+0.5%) in 34 months. Perhaps more important than home sales has been the declining inventory of unsold homes and the decreasing percentage of sales attributed to distressed transactions. In March, 50% of home sales were considered to be “distressed”, compared to 45% in April, 33% in May, and 31% in June. Continued stability in this market is imperative to the economic recovery. 

Unemployment seems to have been the tallest hurdle on the path to a recovery but we are beginning to see light at the end of the (very long) tunnel. For the week of August 3, new unemployment claims beat analysts’ expectations at 550,000 compared to 588,000 a week earlier. July jobless numbers also reflected very slight but psychologically rewarding news. The Department of Labor reported that employers shed a net 247,000 jobs in July, compared to analyst expectations of 320,000 losses. This brings the unemployment rate down to 9.4% from 9.5% a month earlier. The improvement is the first positive employment move in 15 months. Although it is certainly positive to see these numbers moving in the right direction, we believe this falls short of signaling a return to sustainable growth.

The positive unemployment and market movements have created short-term jumps in the value of the dollar versus foreign currencies, but inflation does remain an intermediate-term concern. The combination of a weak dollar, recovering economy and increasing demand for hard assets could likely lead to an inflationary environment. As a result, the Federal Reserve continues to keep a watchful eye on inflationary warning signs and has indicated that the appropriate counter-inflationary actions will be taken. This will likely include increases in interest rates.

As a result of the above mentioned information and other factors, a number of changes are planned in Sequoia portfolios. For many clients, this will mean a decrease in U.S. based equity assets combined with an increase in non-U.S. equities and alternative asset classes. We continue to favor high credit quality fixed income versus lower rated notes. 

On the Sequoia front, we are pleased to announce that we have added John Rodriguez to our asset management department. John has spent time as a Financial Advisor with Morgan Stanley, and most recently spent three years as a fixed income analyst and trader with a local wealth management firm.  He is a graduate of the University of Dayton with a double major in Finance and Business Economics.  We are pleased to have John as a member of our team and look forward to his contributions to Sequoia.  

As always, please do not hesitate to contact any Sequoia team member if you have any questions or would like to discuss in greater detail.

 

Sincerely,