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Quarterly Summaries

2012 Quarterly Summaries

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Review of Securities Markets, Second Quarter, 2012

Stocks declined modestly during the second quarter as investors in the United States turned their focus to the potential 2013 “fiscal cliff”. The fiscal cliff is a combination of tax increases and government spending cuts that will automatically become policy in 2013 if Congress does not intervene before year-end. This combination threatens to dampen growth for an economy that is still struggling to recover from the financial crisis. Many doubt that an already divisive Congress will revise these policies prior to the November election, leaving the decision to a lame duck session of Congress with little time for negotiation at year-end. The fiscal cliff is likely to be an ongoing source of debate, and volatility, for the remainder of 2012.

U.S. large, small and value stocks posted similar single-digit declines. Real Estate Investment Trusts (REITs) were a bright spot as investors sought out yield in an environment of low interest rates. REITs are required to pay a majority of earnings in the form of shareholder dividends so yields often exceed the level offered by other stocks. The highly-anticipated Facebook initial public offering debuted during the quarter; a lukewarm reception increased volatility within the technology sector. The NASDAQ, however, held on to double-digit returns for the first half of the year despite challenges.

Bonds posted positive returns as interest rates declined during the quarter. U.S. government securities continued to benefit from their status as a perceived safe haven in times of uncertainty. Despite ongoing concerns about the financial condition of municipalities, tax-exempt bonds continued to generate positive returns. Investors may conclude, at least for now, that taxes will be higher in the future and are therefore satisfied to assume the risks associated with municipal bonds in order to shelter income from taxation.

Foreign stocks declined during the quarter but held on to positive returns for the year-to-date period. Europe continues to be the lightning rod for investor angst. The continued threat of a global slowdown resulting from recession in Europe spread investor concern internationally. Export-dependent emerging economies, including China and the rest of Asia, were hardest hit during the quarter as Europe’s cold threatens to become exporting-Asia’s pneumonia.

Getting Control of the Situation?

At the end of the second quarter, stocks rallied when the European authorities announced an agreement to form joint oversight of the Eurozone’s banking system. A future banking union would be structured with three pillars including the supervision of all Eurozone banks by the European Central Bank (ECB), a deposit-guarantee fund similar to the FDIC insurance fund in the U.S., and a mechanism to liquidate failed banks. Though the development will be an incredibly complex and long-term undertaking, this is an important and long-overdue step to further unify the European financial system.

The European authorities were forced to address a banking oversight as Spanish bank Bankia teetered on the brink of failure. Bankia was formed in 2010 as a conglomerate of seven Spanish banks and is the third largest lender in Spain. The merger combined community banks that were heavily involved in lending to local real estate borrowers. With the Spanish economy suffering, real estate borrowers have been unable to repay their loans, resulting in large losses for the bank. Depositors learned of the bank’s losses, became concerned about the safety of their deposits, and began withdrawing funds. The process occurred rapidly and the potential for a full-scale bank run became a possibility.

The Spanish government, already having provided billions of euros in bailout funds to Bankia, couldn’t afford to continue alone and needed help from the European Central Bank. With no official oversight in place, the stronger European countries, particularly Germany, were unwilling to bailout the Spanish bank without some authority to regulate its future activities. A stalemate ensued, investors worried and Spanish borrowing rates rose to unaffordable levels. With such a vicious cycle underway, European authorities recognized that they must regain the perception of control even though solutions would be difficult and costly.

During the quarter, CNBC ran an interesting story that discussed the risks of “the street” taking control of Europe’s financial crisis. Street control happens when citizens perceive that government policy can no longer contain the problems associated with a crisis and take matters into their own hands. Citizens attempt to gain control via voting, social unrest, and more extreme measures that influence the financial system, such as staging a run on a weak bank. We have seen glimpses of “street control” over the past few years including the ouster of France’s Sarkozy, the near-run on Bankia and wide-spread protests in Europe. However, authorities eventually acknowledge citizens’ concerns and come together to show they are willing to cooperate on the most pressing issues of the day. So far, the credibility of the European authorities has been enough to quell the street’s fears. The European authorities remain in control of the situation and this perception will be imperative for the development of an ongoing resolution to Europe’s sovereign debt and banking crisis.

Just as the European financial crisis has evolved over time, solutions are likely to come over a period of years, not weeks or months. With positive returns in stocks for the first half of 2012, it is possible that investors have become willing to accept this long workout as long as the European authorities can maintain credibility and continue to develop – and implement – solutions that further the healing process. We continue to believe that foreign stocks are an important part of a well-diversified portfolio and long-term investors are best served by maintaining, and even adding to, investments in their portfolios that have underperformed. As history informs us, long-term investors are most often rewarded for buying investments when the prospects seem most bleak. We are always available to talk with you more about your foreign stock allocation in light of your overall risk tolerance.

Written by Colleen S. Supran, CFA, Principal; [email protected]

Key Economic Indicators


  • Real Gross Domestic Product (real GDP) in the U.S. increased at an annual rate of 1.9% in the first quarter of 2012. This was a decline from a 3.0% increase in the fourth quarter of 2011.
  • In its meeting in April, the Federal Reserve agreed to hold the federal funds target range at 0% to 0.25%. The Committee expects economic growth to remain moderate over upcoming quarters.
  • The U.S. unemployment rate was unchanged in June, remaining at 8.2%. Slower job growth in the second quarter occurred in most major industries.
  • Inflation (CPI-U) has been moderate over the past 12 months, increasing 1.7%. While energy prices have been declining, food prices have been rising, a worrisome trend that could continue if drought conditions persist in the Midwest.
  • Standard & Poor’s 500 Index operating earnings increased 2.15% in the first quarter of 2012 from the fourth quarter of 2011.
  • U.S. non-farm worker productivity decreased at an annual rate of 0.9% during the first quarter of 2012.
  • The Comex spot rate for gold decreased by 3.94% in the second quarter of 2012, closing at $1,604 an ounce.
  • Crude oil dropped almost 18% in the second quarter of 2012, closing at $84.96 a barrel. Consensus is forming that oil price increases may be on the horizon, fueled by tensions in Iran, dwindling inventories and expectations for future economic growth.

Key economic indicators compiled by Barbara A. Ziontz, CFP, Portfolio Manager; [email protected]

Quarterly Review of Securities Markets: Total Returns

IndexMarketLast 3 Months
(04/01/2012 – 06/30/12)
Year-to-Date as of
Standard & Poor’s 500Large Co. U.S. Stocks-2.90%9.31%
Russell 1000 ValueLarge Co. Value U.S. Stocks-2.20%8.68%
Russell 2000Small Co. U.S. Stocks-3.47%8.53%
Russell 2000 ValueSmall Co. Value U.S. Stocks-3.01%8.23%
FTSE NAREIT Equity REITReal Estate Investment3.72%14.92%
NASDAQ 100Technology Stocks-5.06%14.83%
MSCI EAFE*Foreign Stocks-7.13%2.96%
Barclays Capital AggregateU.S. Dollar Bonds2.06%2.37%
Barclays Capital MunicipalMunicipal Bonds1.88%3.66%
BofA Merrill Global Gov’tGlobal Bonds2.35%0.17%

Source: Thomson Financial’s Investment View;

Timeline of Events: A Quarter in Review

Source: DFA Quarterly Market Review (July 9, 2012)

Data Sources: The Wall Street Journal; US Dept. of Commerce – Bureau of Economic Analysis; US Dept. of Labor;;;;;;; ; Dimensional Fund Advisors

Disclosures and Footnotes:

This information is not intended to be used as a general guide to investing, or as a source of any specific investment recommendations, and makes no implied or express recommendations concerning the manner in which any client’s account should or would be handled, as appropriate investment strategies depend upon the client’s investment objectives. It is the responsibility of any person or persons in possession of this material to inform themselves of and to take appropriate advice regarding any applicable legal requirements and any applicable taxation regulations which might be relevant to the subscription, purchase, holding, exchange, redemption or disposal of any investments.

This information does not constitute a solicitation in any jurisdiction in which such a solicitation is unlawful or to any person to whom it is unlawful. Moreover, this information neither constitutes an offer to enter into an investment agreement with the recipient of this document nor an invitation to respond to the document by making an offer to enter into an investment agreement.

The portfolio risk management process includes an effort to monitor and manage risk, but does not imply low risk. Past performance is not indicative of future results, which may vary. The value of investments and the income derived from investments can go down as well as up. Future returns are not guaranteed, and a loss of principal may occur.

Opinions expressed are current opinions as of the date appearing in this material only. No part of this material may, without Bingham, Osborn & Scarborough, LLC’s prior written consent, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient.

(1) Source: MSCI. Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties or originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent.

©2012 Bingham, Osborn & Scarborough, LLC


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