UGH!!! Most of the major stock markets in the world were down in the second quarter, some quite substantially. After a strong start to the quarter, the US market lower in mid-May and kept heading south. The Dow Jones Industrial Average posted a 6.8% decline, and the S&P 500 was down 2.7%. Financial stocks again led the way with the KBW Bank Index off 26% for the quarter and 34% for the year. The NASDAQ was flat for the quarter but declined by 13% year to date.

Many of the emerging markets were down even more than the US and Europe through June 30. China was off nearly 50%, and India declined nearly 35%. There is no way to sugarcoat worldwide stock market activity; it has been a lousy market since last October. The high cost of imported oil and the decline in the value of our homes are the main problems as we view it. The ramifications of these problems are rocking the financial markets.

The bond market mirrored the stock market in some respects. Corporate bonds rallied into May then weakened on the negative outlook for bond insurers and investment banks. As bonds fell, the yields on low quality bonds rose. The 2-year Treasury bond also lost ground as investors decided the Federal Reserve’s next move might be to increase short-term rates because of inflation pressures. Despite higher inflation readings however, bonds have managed to post positive returns year to date.