Elliott
Cove
Economic and Market
Commentary – Period ending June 30, 2010
The
second quarter of 2010 saw a sudden turn in the economic news and in the
financial markets. The
economic news worsened and the financial markets responded with a flight
to quality and safety, resulting in falling prices for stocks and rising
prices for high quality bonds.
The
second quarter produced clears signs of a slowdown in the
US economic recovery. The first quarter’s
GDP growth came in at 2.7%
compared to the fourth quarter’s rate of 5.7%. Employment data was difficult to
read because of temporary Census hiring, but fewer new private sector jobs
were added in May and June than in April. The Conference Board Leading
Indicators showed declines in April and May, pointing to slower growth
ahead. The Consumer
Confidence Index, which had risen for three consecutive months, declined
sharply in June, apparently in reaction to the slowdown in job
growth.
Foreign economic growth was also called into question as
the debt of foreign governments in the Euro zone grew into a major issue
during the quarter.
Especially significant was Greek government debt, which was
downgraded and caused concern of a spillover to other European
nations. The concerns were
alleviated to some extent by the eventual passage of a rescue package by
the European Central Bank.
However, significant damage was done and the Euro declined compared
to the US dollar.
China indicated it was
concerned about the rapid pace of its economic growth and the rise in real
estate prices, instituting measures designed to reign in excessive
borrowing and speculation.
All of
these factors weighed on the financial markets. After reaching cyclical highs in
late April, the stock market saw a sharp increase in volatility and a
significant correction, with the S&P 500 Index declining 15.3% from
its April 23rd peak through the end of the quarter, leaving the
index down 11.4% for the quarter and down 6.65% year-to-date. Meanwhile, the flight to safety
and quality resulted in an increased demand for US government securities
with prices rising and interest rates declining on these instruments,
leaving bonds substantially ahead of stocks for the quarter and
year-to-date.
With
the flight to safety, the most volatile sectors, financials, materials and
energy, led the market down.
Utilities, REITs, and consumer staples declined less. For the quarter, large value
outperformed large growth by a narrow margin, while the opposite was true
for small cap stocks. Small
and mid cap stocks declined less for the quarter than large cap stocks
both domestically and in foreign markets.
Dimensional stock funds do not invest in REITs or utility
stocks, which worked against the funds in the second quarter and the
Dimensional US equity funds trailed their benchmarks by narrow margins.
Among the U.S. funds, Dimensional U.S. Large Company lost -11.50% for the
quarter and -6.68% year-to-date, while U.S. Large Cap Value saw a greater
loss of -12.80% for the quarter and -4.24% year-to-date, compared to the
Russell 1000 Value Index returns of -11.15% and -5.12% for the same
periods. U.S. Targeted Value
with its small cap emphasis lost -11.68% for the quarter and -1.31%
year-to-date compared to the Russell 2000 Value Index, which lost -10.60%
and -1.64% for the same periods, and U.S. Vector, being a mix of large and
small cap, value and growth, produced a loss of -10.83% for the quarter
and -2.28% year-to-date.
Although all of the equity funds have negative returns for the
quarter and year-to-date, they all show substantial positive returns over
the last year, led by U.S. Targeted Value with a 27.14% gain.
International value stocks slightly underperformed growth,
but small cap outperformed large cap and with the decline in the Euro,
foreign markets generally underperformed US markets. Dimensional International Value
underperformed Dimensional Large Cap International -14.80% vs. -14.06% for
the quarter, and -13.08% vs. -12.78% year-to-date. Dimensional International Small
Company lost -10.69% for the quarter and -5.93% year-to-date. Dimensional Emerging Markets Value
lost -9.34% for the quarter and -6.26% year-to-date, but was still up
27.5% over the last year.
Dimensional Real Estate lost -3.93% in the second quarter,
but was still up 5.84% year-to-date.
Interest rates declined during the quarter producing gains for the
fixed income funds. The
Dimensional Intermediate Government Fixed Income fund returned 4.47% for
the quarter and 6.25% year-to-date, while Dimensional Two-Year Global
Fixed Income and One-Year Fixed-Income returned 0.49% and 0.35%
respectively for the quarter and 1.09% and 0.74% year-to-date. Short-Term Extended Quality
returned 1.62% for the quarter and 3.35% year-to-date. The Intermediate Government Fixed
Income fund was the best performing fund in the Portfolios over the last
two and three years.
With
the significant decline in the stock markets, all of the Portfolios
produced negative returns for the quarter. However, all Portfolios continued
to provide strongly positive returns over the last year. The more aggressive Portfolios
produced the largest losses for the quarter, as equity funds
underperformed fixed income funds for the quarter. The opposite was true over the
last year. Note that all of
the Portfolios continue to outperform the S&P 500 Index over the last
five years.
