First, I hope all our clients and friends affected by recent fires, stifling heat, and severe storms are safe and sound.
In the wake of one of the worst monthly performances on record, world markets soared to their best day of 2012 in the second quarter’s final trading session. The surge came after European leaders unexpectedly agreed to strengthen support for their troubled banks. The benchmark Standard & Poor’s 500-stock index climbed 2.5%. In Europe, the debt relief news lifted the Euro Stoxx index up 5%. In other segments, the S&P’s Goldman Sachs Index of 24 commodities jumped 5.6%; its biggest gain since April 2009.
Indeed, stocks ended the 2nd quarter in the red but the June 29 rally helped global stock markets close out the year’s first half on a strong note. Total returns for the S&P 500 are 9.49% for the first six months of the year, 2.96% for the foreign developed markets (MSCI EAFE) and 2.29% for the emerging markets (MSCI EM). If U.S. stocks remain unchanged through year end, 2012 will be considered a good year by historical standards.
In spite of the initial optimism over Europe’s bailout plan investors remain skeptical about the long-term effects of the major breakthrough in solving Europe’s problems. This time, let’s hope that European leaders show a new resolve to address some of the fundamental issues they have avoided. In the United States, economists are waiting for companies to begin announcing their second quarter financial results to see how the European slowdown has affected American companies.
Against a backdrop of European debt woes, slow growth in the U.S. and weakness in the emerging-market economies, Friday's rally is a good reminder about the importance of remaining disciplined. Keeping investment strategy on course, amid a never ending series of short-term, positive and negative headlines, is paramount to capitalize on all that markets have to offer long-term. This is not to say that stocks are sure to provide appealing long-term returns. But the notion that risk and return are related is so simple and so widely acknowledged that it hardly seems worth arguing about.