2nd Quarter 2012
After an impressive start to the year, volatility returned to the
equity markets in force during the second quarter. The Standard &
Poor’s 500 index fell 3.3% for the quarter as a late June rally
eased some of the pain from May’s 6% decline. International stocks,
small company stocks and commodities all underperformed the
benchmark S&P 500 as renewed concerns about Euro-area debt and
global growth weighed on investor risk appetite. In a reversal from
the first quarter, historically defensive sectors outperformed as
telecommunications stocks (+12.6%) and utilities (+5.5%) were the
best performers while financial, technology, and energy companies
declined 6-7% during the quarter.
The sharp decline in May was initially sparked by the first Greek
election and renewed investor fears of an imminent break-up of the
European Monetary Union. Sentiment received a boost to end the
quarter as European leaders agreed on a number of measures which
would lay the groundwork for bank re-capitalizations and a more
centralized banking regulator.
U.S. economic sentiment seemed to turn on a dime as manufacturing
surveys turned negative and a number of high profile companies
notified investors of poorer growth outlooks. Tight austerity
programs in Europe have very likely resulted in recession in a
number of countries and the weak manufacturing and persistently soft
jobs market have reignited talk of a U.S. recession.
Bond yields continued to decline as the benchmark 10-year U.S.
Treasury closed the quarter yielding approximately 1.6%. Domestic
bond prices climbed nearly across the board (bond prices and yields
move inversely). Government bonds rallied as many investors sought
out the relative safety of the U.S. Treasury market and lower rated
corporate bonds gained as other investors stretched for income.
At the close of the quarter, sentiment can best be described as
cautiously optimistic. European leaders provided some hope that they
will be able to contain their debt crisis. Likewise, some positives
began to emerge domestically. Lower commodity prices and an
improving housing market are providing some relief to consumers.
“Homeowner’s equity grew at its fastest pace in fifty years,
eliminating the previous drag from the negative wealth effect”
according to BCA Research.
Overall, we would count ourselves as being in the cautiously
optimistic camp. The U.S. economy continues to recover, albeit at a
painfully slow pace. It appears to us that the leaders across the
pond are finally beginning to take the necessary steps to contain
their debt crises and allow the European financial sector to heal.
While we believe that many of the aforementioned concerns are
largely priced into the market, we are well aware that in the
current environment the market will be more susceptible to outside
shocks and “headline risk.” The impending elections, the well
publicized fiscal cliff, and the situation in Europe will likely
continue to add to volatility until the resolution of each becomes
clearer. Reasonable stock valuations, extremely accommodative
monetary policy around the globe and relatively balanced sentiment
As investors with a long term focus, we continue to invest in
companies with sound balance sheets, strong cash flow, attractive
business outlooks and inexpensive valuations. Within the fixed
income markets we remain selective and take advantage of
opportunities when they present themselves by focusing on both the
return of and the return on principal. Based on current valuations,
we continue to view equities as relatively more attractive than
bonds for a long-term investor, but we believe it is prudent for
investors to take a balanced approach given the uncertain climate.
We welcome your comments or questions and thank you for your
Archer Investment Corporation
Steven C. Demas
Troy C. Patton CPA/ABV
John W. Rosebrough CFA