Ameriprise Advisor Services, Inc. Investment Research Group
SECOND QUARTER - 2009
Quarterly Capital Market Digest July 2009
SENIOR MARKET STRATEGIST
Marc A. Zabicki, CFA
PLEASE NOTE: FOR IMPORTANT DISCLOSURES, INCLUDING POTENTIAL CONFLICTS OF INTEREST, PLEASE SEE THE LAST PAGE OF THIS PUBLICATION
Quarterly Capital Market Digest - SECOND QUARTER - 2009 Page 2 of 4
Back On Track?
Global markets moved from bouts of depression in the first quarter toward increased appetites for risk in April, May, and June. Risk-based assets in equity, bond, and commodity markets improved across the board
through most of the second quarter, but waned a bit in June as global economic indications showed still-weak real demand. The S&P 500 rose 15.2% for the period, while the MSCI EAFE and the MSCI Emerging
Markets Index gained 23.8% and 33.6%, respectively. The riskier assets outperformed as investors searched for beta in a rising market, while safe-haven Treasuries and other high-grade sovereign credits suffered.
Oil and other key commodities were significantly higher, due to renewed expectations of a rebound in economic growth, and market participants also leveraged risk via a healthy take-up of emerging market equities.
The return to more reasonable expectations in the market was also highlighted, most pointedly, in the cyclical equity sectors such as U.S. Financials, Technology and Consumer Discretionary issues. This U.S. sector
development was similarly replayed in other global regions during the quarter. While the capital markets returned from the abyss late Q1 and Q2, investors paused a bit in June as concern developed over the pace
of global economies and whether asset prices had come too far too fast. June major market returns contrasted a bit with the quarter's performance as the S&P 500 finished flat for the month while the MSCI EAFE
and the MSCI Emerging Market Indices closed with slight losses.
In the U.S., further investor realization that doomsday was not upon us sparked much of the second quarter's equity gains. In our view, the advance was overdue and justified as a a return to more rational
expectations was expected. Activity slowed in June, again as -expected, once investors picked the low hanging fruit and recalibrated their expectations for the likely slow, fundamental pace of the economic recovery.
Economic data in the U.S. did improve during the second quarter, although the numbers in aggregate did not signal a robust rebound in economic activity. U.S. capital markets reacted to indications that were "less
bad", but a definitive improvement in the economic environment has yet to be seen. The U.S. jobs market has shown some signs of stabilization and Initial Jobless Claims may have seen their peak in this cycle.
However, unemployment figures have pushed higher (9.5%), which has caused some investor concern that consumer spending could remain lackluster and savings rates could be sticky at near 7% of disposable
income. This level of consumer saving, while needed to replenish balance sheets, has not been seen since the early 1990s. During the quarter, consumer and business spending patterns continued to be influenced
by a reduction in credit availability and a credit market that is improved but is not fully functional. This shift in spending habits and credit has caused investors to refocus expectations toward a more modest
economic and equity market recovery scenario.
Internationally, the major market story continues to be the equity returns in emerging markets. The take-up of risk during the quarter, prompted significant equity gains in emerging market stocks, particularly those
of the Asia-Pacific and BRIC countries. The investors thesis behind the gains was that these markets could be somewhat removed from the bank and economic problems of the more developed economies. China's
working stimulus package ($586 billion) has been a source of positive sentiment for investors as market participants focused on a recovery in China's economy. In fact, 2009 and 2010 GDP growth forecasts for the
nation have been revised upward, based on the likely benefits of the stimulus package. Gains of 24.7% in the Shanghai Composite during the quarter, and the faster growth expectations helped prompt the take-up
of other Asia-Pacific stocks, as investors sought exposure to the regional economic power of China. Meanwhile, India reported the largest equity market advance, during the quarter, as investors cheered what was
seen as pro-business political election results in the country. The Asia-Pacific region clearly led the globe in the equity advance during the period, with Latin American markets also performing well. Developed
European markets posted positive results, but in aggregate, the returns were less robust than those found in the U.S.
Commodity prices and a weaker U.S. dollar were also key stories during the period. Higher commodity prices and strength in other global currencies (see page 3 for detail) were largely a result of improved economic
and market sentiment. Investors postulated that demand for commodities and currencies would increase as risk-aversion subsided. China's stockpiling of raw materials (in part to prepare for its infrastructure
building plans) caused a rebound in many commodity prices, while speculation of future demand helped oil traders book profits in the period. The U.S. dollar was pressured (the U.S. Dollar Index fell 6.3% during the
quarter) by investors swapping out of the "safe-haven" currency, worries over the expansive U.S. budget deficit, and speculation of reduced foreign demand for U.S. Treasury securities.
To account for a now more-constructive equity environment and a likely rebound in economic activity, we have recently increased our suggested exposure to U.S. cyclical sectors at the expense of defensive groups.
Specifically, we have raised our view on the Industrials and Energy groups, while becoming more cautious on Consumer Staples, Consumer Discretionary, and Utilities. More broadly, we believe global markets are
back on a slow track and biased to rise further this year. However, volatility will likely remain pronounced and the best equity gains since the March lows have already been booked. We believe, investors should
prepare for modest returns for the balance of 2009. In this environment we maintain a positive outlook on the U.S. and Asia-Pacific regions, and we have constructive views on Latin America, the Eurozone, and the
U.K. See our most recent Global Allocator and Market Strategy Viewpoint, or consult with your financial advisor for more detail.
Senior Market Strategist
Marc A. Zabicki, CFA
Quarterly Capital Market Digest - SECOND QUARTER - 2009 Page 3 of 4
Second Quarter Commodity Table
Q-end Price Q1 % chg
49.3% Crude Oil 49.66 40.7%
Second Quarter: Select Equity Index Price Returns Natural Gas 3.68 1.1%
Gold 916.50 2.0%
35.4% Aluminum 64.75 16.2%
Copper 188.90 20.8%
22.8% 24.7% Corn 385.00 -12.2%
Wheat 466.00 -7.5%
11.9% Second Quarter Currency Table
Q1 % chg
Australian Dollar vs. USD 16.7%
New Zealand Dollar vs. USD 15.4%
MSCI Em Mkts
British Pound vs. USD 14.9%
Canadian Dollar vs. USD 8.4%
Swedish Krona vs. USD 7.1%
Danish Krone vs. USD 5.9%
Euro vs. USD 5.9%
Swiss Franc vs. USD 4.9%
Norwegian Krone vs. USD 4.8%
Second Quarter: U.S. Equity Sector Price Returns
Japanese Yen vs. USD 2.7%
Treasury Yield Curve
8.9% 10.1% 8.3% 8.8%
Second Quarter Yield/Spread Table Corp. Bond Basis Pt. Spread vs. 10yr T
Fed funds 3M T-bill 2yr T 5yr T 10yr T 30yr T 10yr TIPS 30yr TIPS Prime Rate 3M LIBOR 30yrFixMtg "AA" "BBB" "B"
Q1 End 0.31% 0.21% 0.80% 1.66% 2.67% 3.53% 1.35 1.81 3.25% 1.19% 4.20 314 591 1172
Q2 End 0.10% 0.19% 1.11% 2.56% 3.54% 4.34% 1.76 1.99 3.25% 0.60% 4.93 184 401 853
Chart and Data Sources: Bloomberg, Thomson Financial
Quarterly Capital Market Digest - SECOND QUARTER - 2009 Page 4 of 4
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