Two weeks ago, one of Wall Street’s largest market-making and trading firms, relying on a computerized trading program, shook investors’ confidence in the market. Trying to gain an edge on its competitors, seventeen-year-old Knight Capital Group rushed out new trading software that wasn’t ready. Instead of fulfilling customer orders, the software unintentionally generated millions of erroneous trades, causing sudden wild price swings in dozens of stocks. As trading volumes expanded, some Wall Street participants profited from the unusually dramatic price swings triggered by the faulty software. Many retail customers, having no idea what was going on, wound up losing money. Some journalists accused Wall Street insiders of using their trading tactics to rip off small investors: but the opposite, in this case, seems more accurate. The mishap cost Knight $440 million in trading losses and forced them to accept a lifeline to skirt collapse.

Concerned about economic growth, global central banks acted to stimulate borrowing. China’s central bank cut lending rates. The European central bank cut its benchmark interest rate. The Bank of England announced it would expand its holding of government bonds. The Federal Reserve announced 2 weeks ago that it would extend its own bond buying program until the end of the year.

First, I hope all our clients and friends affected by recent fires, stifling heat, and severe storms are safe and sound.

The possibility of Greece leaving the Eurozone thereby triggering a string of sovereign defaults remains a key focus of the market.  A re-run election in Greece, June 17, failed to curb uncertainty. It remains at a high level.

Global stock markets ended the month with their worst performance in two years. A flight to safety pushed the U.S. 10-year Treasury yield to an all-time low of 1.58%. The S&P 500 index fell 6.27%. This was the index’s eighth worst May in history, and its worst performance since its 8.20% loss in May 2010.  But that year the returns for the index actually totaled 15.06%. Currently, the S&P is down 7.66% from its April 2nd high, but it remains 5.16% ahead YTD with dividends included.

Global stock markets have stumbled since the start of the second quarter as the Chinese economy slowed, the euro zone crisis escalated, and U.S. manufacturing and employment gains tapered off.  The decline in stock prices has been accompanied by sharp increases in volatility.

In April, the S&P 500 stock index posted its first monthly decline since November. Stocks slipped on rising fear that the U.S. economic recovery might be faltering. The deep recession in Spain, combined with trouble in its banking sector and reports of a double dip recession in Britain highlighted risks in the developed markets and raised more questions about whether government belt tightening in Europe had gone too far.

With bond yields still hovering around historic lows, some investors may be tempted to consider dividend-paying stocks as a way of generating income from their portfolios, presumably with the benefit of not having to sell from their principal. Before embarking on this strategy, it is important to understand several considerations as explained by Apollo D. Lupescu, PhD, Vice President. Dimensional Fund Advisors LP.

Standard & Poor’s (S&P) recently released their year-end 2011 S&P Indices versus Active Funds [SPIVA] Scorecard.  The Scorecard is designed to compare the performance of actively managed mutual funds against their appropriate benchmark indices (the PDF can be found here).

S&P 500 Q1 returns totaled 12.59%. Best performance since Q1 1998. Surge fueled by good U.S. economic data, including unemployment rate ticking down and rising consumer spending. U.S small cap stocks underperformed U.S. large cap stocks but still managed a 12.44% gain. In non-U.S. developed markets and emerging markets small caps outperformed large caps.  Large value underperformed large growth around the globe. Small value outperformed small growth in the emerging markets and had mixed results in developed markets.