The Second Half Has Got to Be Better

07/12/2010 9:46 am EST

Focus: MARKETS

Janet Brown

Editor, NoLoad Fund*X

Janet Brown, editor of NoLoad Fund*X, says the market’s first-half performance was pretty bad, but she advises investors to stick with stocks for the rest of the year.

With 2010 half over, stock investors around the globe are mostly looking at losses. [Before last week’s big rally, the Standard & Poor’s 500 index was] down nearly 7% this year, the [Dow Jones Industrial Average was off] 7%, and small stocks in the Russell 2000 [had fallen] 3%.

Since late April, when the market reached its high for the year, the S&P 500 lost 14.5%. For the [second] quarter, the S&P 500 and the Nasdaq Composite index are both down 12% and the DJIA is off 10%.

Last year’s optimism seems to have faded, as the “jobless recovery” weighs heavily on the American psyche, bringing a sense of economic uncertainty that many cannot seem to shake.

The damage during the quarter was widely felt, as housing stocks finished the quarter down 21%, materials [were] off 16%, financials [were] down 14%, and both energy and industrials lost 13%. Leveraged funds also registered large losses.

Investors sought the safety of the dollar and US government bonds. Treasuries rose strongly as yields fell further, and gold was among the few bright spots, up 12% in the second quarter. This flight to quality [hurt] the performance of most risky assets.

We can check off a laundry list of potential worries: the economic crisis in Europe, monetary tightening in the emerging markets, the tragic oil spill in the Gulf, extreme market volatility including the harrowing “flash crash,” to name a few.

The market correction brought a reversal of this year’s trend favoring domestic funds over internationals. Most top-ranked funds remain domestic, but some international funds had better returns in June. Top performers for June were emerging markets, defensive funds, and gold. REITs (real estate investment trusts), health care stocks, and utilities were among the most modest losers.

Sometimes, especially when news is dire and markets move against us, we tend to forget our long-term goals and become preoccupied with short-term volatility. Declines in the stock market have scared some investors away from stocks, but with cash and Treasury yields so low, most of us simply have to take some risk in order to make our assets grow. It comes down to simple math of how much you need and how must it grow to keep up with living expenses and inflation.

We do not know how the rest of this year will play out. Clearly, the debt burdens besetting our financial system will take years to work out. But we also know that markets are forward looking. History tells us that bad news will continue well into the next significant rally, so we do not believe in waiting for problems with the economy to play out.

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