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Monthly Market Monitor - June 2010

Market Indices1May ChangeYear-to-Date (05/28/10)
S&P 500-8.2%-2.3%
MSCI EAFE-12.1%-13.7%
Dow Jones Industrial Average-7.9%-2.8%
Russell 2000-7.7%5.8%

Return of Volatility
Stock markets around the world have experienced spikes in volatility as investors attempt to gauge the depth of the problems in Europe. Concerns originally centered on Greece, but have since spread to other European countries. The central question is whether or not the European debt problems will slow or even halt the global economic recovery. Both Standard and Poor’s and Fitch, two prominent rating agencies, downgraded the debt of Spain in the past month. S&P changed their rating to AA from AA+, while Fitch lowered theirs to AA+ from AAA. While the downgrades may not have come as a big surprise to most investors, they serve as another reminder of the fiscal difficulties facing numerous countries. Meanwhile, Greece is facing even more severe problems. Some analysts are questioning whether Greece can in fact get out of its debt hole by simply enacting spending cuts and tax increases. These analysts believe that the hole is simply too large, and that a debt restructuring (a more politically correct way of saying a default) is inevitable. Others, however, argue that the European Union, possibly with the help from the International Monetary Fund, will find ways to aid Greece without a default.

These and other concerns led most major indexes lower in recent weeks. The long awaited “correction” finally arrived in May. A correction is generally defined as a pullback of at least 10%. Markets had not experienced a decline of more than 10% since March 2009. Many strategists had been predicting such a correction for months, only to watch markets march higher. Some analysts actually view corrections as healthy for the markets. They argue that pullbacks offer buying opportunities as markets refresh themselves. With the declines of 2008 still fresh in investors’ minds, however, any sell off could trigger fears of larger declines to come.

On the Positive Side
It’s not all bad news, however. The global economic recovery is for real and remains intact for now. The U.S. economy has now posted positive GDP growth for three straight quarters. In addition, the job market continues to improve. In the first four months of the year, the U.S. economy added 500,000 jobs, which is the largest increase since March 2006.2 Perhaps due to growing optimism over the job market, retail sales have also seen recent gains. April marked the seventh consecutive month of retail sales improvements. Investors will have to balance the problems in Europe with the improving economic climate in reaching their investment decisions going forward.

  1. Wall Street Journal, 06/01/10
  2. Bureau of Labor Statistics, 05/28/10

Prepared by:Cameron Lavey, MBA
Senior Investment Analyst
Research Department, Cetera Financial Group

The views are those of Cameron Lavey, Senior Investment Analyst, Research Department, Cetera Financial Group, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.

All economic and performance information is historical and not indicative of future results. The market indices discussed are unmanaged. Investors cannot directly invest in unmanaged indices. Please consult your financial advisor for more information.

Additional risks are associated with international investing, such as currency fluctuations, political and economic instability, and differences in accounting standards.

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