INVESTMENT NEWSLETTER
June 2010

A Step Back

The stock market suffered its worst May in a half century as volatile markets reacted to a variety of concerns. The DJIA lost 8.3%, the S&P 500 gave back 8.1% and the small-cap Russell 2000, 7.5%.

Recent worries ranged from Europe's fiscal woes to diminishing demand from China. At worst, the S&P 500 closed down 12% from its peak in April, before bouncing at month-end. We have now officially had a correction, as all major indexes declined more than 10% from recent peaks. This is the first true correction since the March 2009 low, from which the S&P 500 is still up 60%.

Remember, two steps forward and one step back - stock declines are part of normal market action. Since 1926, there have been 20 stock market corrections during bull markets, meaning 20 times the market declined 10% but did not subsequently fall into bear market territory. No one knows if the correction is near completion, or if the powerful bull market that began in March of 2009 will give way to a new bear market. But we do know, based on historical patterns, that a bull market rally of this magnitude without a 10% pause would be unusual. We also know that stocks are at least 10% cheaper than at their recent peak.

Historically, the first correction in a new bull market has come after average gains of 57%, implying the current bull market was overdue for a correction.

The distinguishing factor of this recent correction is that it occurred quickly compared to previous corrections. It took just 27 days for the market to surpass the 10% decline threshold, which is half the average time. Presently we are encouraged by a number of observations. Certainly, the debt crisis in Europe is worrisome, primarily because another shock to global financial institutions would have a significant impact on investor psychology. The fundamental economic impact on the U.S. may not be great, however, since Greece, Spain and Portugal together account for less than 1% of U.S. exports.

Domestic growth may be slowing but the economy is clearly recovering. First-quarter earnings were quite good - rising 31% over the same period last year, the most since 1984 and more than 15% above analysts' expectations. All 10 sectors of the S&P 500 posted year-over-year profit and sales growth. As a whole, the S&P 500 is beating estimates at the greatest rate since 1987 when such data was first tracked.

Predictably Unpredictable

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.

Stick to the Discipline

We focus on current performance in a way that prevents us from over-reacting to short-term market moves. We believe the key to long-term success is being aligned with what is working, even if what's working now feels out of sync with what we might expect. Meaningful trends last long enough for us to have the luxury of waiting to learn the reasons for those trends.



Thank You for your trust and continued support!

Sincerely,

P. Michael Valley II
Estate Planning Professionals