Second Quarter 2011: Market Review & Outlook

While in the first quarter of this year markets withstood the shocks of the earthquake and tsunami in Japan and the social unrest in the Middle East, the second quarter brought more challenges. Weak US economic data poured in and by mid-May talk of a double-dip recession was weighing heavily on investors’ minds. In China, tightening measures taken to prevent the economy from overheating led to more questions on the sustainability of global economic growth. And in Europe, a theme familiar from a year ago, the sovereign crisis flared up again, with Greece at center stage.

In all, with the various macro uncertainties reverberating throughout the quarter, it was a challenging environment for equity markets. However, a sharp relief rally at the end of the quarter driven by a temporary solution to the Greek sovereign crisis brought markets back to positive territory. In the US, the S&P 500 was up a modest 0.1% while overseas the MSCI EAFE rose 1.8% (see Exhibit 1). US treasury markets rallied with the yield on 10-year treasuries falling to 3.16% from 3.47%. Prices rise when yields fall. The drop in yields has defied many strategists and analyst views within the investment community. Other risky assets tied to the economic cycle, such as commodities, weakened with the DJ-UBS Commodity Index falling 6.7% in the quarter.

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