INVESTMENT NEWSLETTER
May 2010

Meaningful Recovery

Markets continued their upward march in April, The DJIA gained 1.1%, the S&P 500 gained 1.3% and the small-cap Russell 2000 surged 4.8%. Small-caps are now back to where they were two years ago and both large-cap indices are within 10%.

Leading economic indicators have improved markedly as the global economy continues to heal. While housing remains sluggish and unemployment remains a problem, the healing under way is seen in the growth of world trade, led by the U.S. Unlike previous economic recoveries, typically fueled by construction and inventory buildup, the new recovery is led by exports. Trade flows have rebounded and manufacturing activity has expanded to meet global demand.

Weak spots around the globe are the euro zone, the United Kingdom and Japan. Demand and growth are stronger in emerging markets, particularly China and India, but these countries are volatile and prone to boom and bust periods. Emerging markets are no longer just factories for the developed world, but home to rapidly growing ranks of consumers who increasingly buy from developed markets. These emerging economies, primarily in Asia and Latin America, account for almost half the growth in global consumption, the primary driver of GDP.

Strong economic data and even-stronger corporate profit performance co-exist with a Federal Reserve that remains stimulative. At their last meeting, the Fed kept interest rates at historic lows and reiterated previous language that rates would stay low as long as economic conditions warranted. With interest rates near historic lows, a strong economy must eventually cause interest rates to trend up. But for now, demand for bonds and the safety of U.S. securities remains strong, particularly given the turbulence in the euro zone.

The rebounding economy - improving manufacturing, construction and consumer spending figures - along with a stronger stock market drove oil prices higher. Gold also surged.

Leadership


Domestically, small-cap funds continued to lead by wide margins in April, closely followed by mid-cap funds. Small-cap funds more than doubled the returns of large-caps so far this year. Both small and mid-cap funds have far outpaced large-caps from the market bottom in March 2009.

Value funds as a group outperformed growth funds again as they have all year. The top performing sector was real estate last month, followed by consumer discretionary, industrials and technology. The only losing sectors were consumer staples and health care.

Overseas funds, both developed and emerging markets, sank in April. Europe funds were weakest, followed by China and Latin America. Foreign funds continued to sink in relative performance, fueled in part by a stronger dollar.

Recent market extremes have shown just how unpredictable markets can be. In less than three years stocks fell 55% and then recovered to within 15% of the prior peak. While no one knows how long a current trend will last, we do know it will eventually change. That's expected. We prepare for change by staying alert, watching each month to see if portfolio changes are warranted, but both disciple and flexibility are key.

Sticking to a discipline may be the most important contributor to long-term investment success. Over time, deliberate action almost always triumphs over following one's impulses.

Thank You for your trust and continued support!

Sincerely,

P. Michael Valley II
Estate Planning Professionals