Quarterly Recap - 2011 Second Quarter

The second quarter began with uncertainty around the globe focused on uprisings and U.S. military actions in North Africa and the Middle East, earthquake aftermath in Japan, the sovereign debt issue in the Eurozone, and budget issues prompting S&P to revise its outlook for long-term U.S. sovereign debt to negative. Civil unrest in North Africa and the Middle East continued to escalate over the quarter, and concerns regarding the European Union's sovereign debt issues and implications for the Euro mounted, with all eyes on Greece. Over the quarter, equity markets retreated as these issues persisted and fears of a slowing global economic recovery were confirmed by most major economic reports, particularly in the housing and manufacturing sectors.

At the end of a highly volatile three months, the broad market S&P 500 Index finished slightly above where it began, returning 0.10% for the period and up 6.02%, YTD. The more defensive Healthcare, Consumer Staples, and Utilities sectors were the leaders for the quarter, with growth beating out value, and midcaps coming out ahead of its small- and large-cap counterparts.

Outside the U.S., developed equity markets continued to build on a strong first quarter run, returning a less robust but positive +1.83%, as measured by the MSCI EAFE Index. In Europe, the sovereign debt concerns that plagued the region for much of 2010 and the first quarter of 2011, persisted once again with heightened concerns now focused on the fiscal health of Greece. Markets rallied toward the end of the quarter as Greece agreed to austerity measures and gave investors reason to be optimistic.

Emerging equity markets reflected geopolitical challenges and economic concerns around the world, returning a modestly negative -1.04%, as measured by the MSCI Emerging Markets Index, and giving back some of the first quarter returns, but still ending up +1.03% YTD. Latin American markets extended a first quarter pullback amid concerns that Brazil's central bank could raise rates and that the sustainability and rate of China's growth, and its demand for Latin American commodities exports will wane.

Fixed income markets were the clear winners over the quarter, narrowing equity markets' YTD lead. U.S. bonds generated a positive gain of +2.29% for the period as measured by the Barclays U.S. Aggregate Bond Index. Concerns surrounding the possible future upward movement of interest rates were put aside as bond markets became a safe haven during the global turbulence witnessed in the quarter. The $600 billion QE2 Treasury bond buying stimulus program was completed with the end of the quarter on 6/30/11, and it remains the position of the Federal Reserve that no additional stimulus are in the works.

Municipal bonds continued their climb in the second quarter as the fears that plagued the sector during the end of 2010 were found to be overblown. The sector, as measured by the Barclays Municipal Bond Index, returned a respectable +3.89% for the quarter and 4.42% YTD. High yield bonds, continuing a positive trend, but with a fraction of the vigor seen in the previous quarter, were likely hurt by disappointing economic data, returning +1.05% for the quarter and 4.97% YTD, as measured by the Barclays U.S. Corporate High Yield Index.

1. Morningstar Direct

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