Quarterly Performance Summary: Fear Is Stronger Because It Lasts Longer

Includes: DIA, QQQ, SPY, TLT
by: J Clinton Hill

Remember that old gangster movie (the title escapes my memory at this moment) in which one of the characters was asked his preference: to be respected or be feared. He answered “fear, because it lasts longer.” This movie line more or less sums up the results of the 2nd quarter when one separates the wheat from the chaff in terms of asset classes, benchmark equity indexes, major sectors, and industry groups.

Major Asset Classes

For all the hoopla and attention showered upon gold this quarter, it was not the best performing asset. That honor is reserved for the VIX (volatility or fear index) which delivered a whopping 96.36% return. Gold did deliver a respectable 11.74% for the quarter, but even this was not good enough to beat bonds which came in second with 13.69% return for the 20-Year Treasury Bond ETF (NYSEARCA:TLT). Equities were the least desirable asset to hold as the S&P 500 lost -11.86%. Fear and preservation of principal are in the driver’s seat for now and likely to remain there for 3Q-2010 until the outlook on future macroeconomic conditions improves.

U.S. & Global Equities

Here is where things get interesting. Typically, emerging markets are the least favored place for capital during a global financial crisis. The saying “this time it’s different” actually rang true for the quarter. India and South Korea were the only two markets that managed to eke out positive gains this period. China, at the other end of the spectrum, was the worst performing major global market while Japan finished second to last. China’s overheated real estate market and government credit tightening policies are casting a shadow over its high single digit GDP growth rates. Japan is another story. As the sick man of Asia, it is plagued by high debt and a shrinking labor force doomed to support a proportionately larger elderly demographic segment.

Switching over to Europe, one would hardly expect Germany to come in 3rd place by ceding only a -3.06% loss when the euro has taken such a depreciation beating. As I wrote in a previous blog report, “that which does not kill Germany will make it stronger.” The Germans are almost unmatched in the labor productivity and exporting prowess. Europe’s pain will continue to be Germany’s gain and I would look for it to outperform the market once euro-region sovereign debt concerns are sufficiently contained to the satisfaction of investors.

In the U.S.A., the negative performance of the major equity indices were relatively equal across the board. Utilities and Transportation indexes were the strongest in terms of relative strength. The underlying economic problems still exist and so far a slow or slight improvement is the best result thus far. High unemployment rates, soaring government debt, high federal and state fiscal budgets unsustainable with existing tax receipts, and a real estate market resting on a foundation of quicksand are spooking the market’s investors. Credit remains tight and corporations are closely guarding their cash instead of hiring or committing to new capital investments. This situation is mainly due to uncertainty of a sustainable economic recovery, potential new tax laws, and future obligatory employee health care costs. Despite all this, the stimulus measures have stimulated some positive GDP growth but this jump start has yet to prove sufficient to get the private sector firing on all cylinders.

ETF Sectors

Utilities and telecom stocks may not have gained the proper appreciation (no pun intended) from the market even though they tend to pay relatively higher dividends versus other sectors. These two sectors proved to be the lesser of all evils when it came to putting money in stocks. Commodity related sectors such as materials and energy suffered under a resurgent dollar. Financials found themselves in the doghouse once again and taken to task with pending financial reform and regulatory legislation.

Leading and Lagging Industry Groups

If your company offers cheap entertainment (music and video stores) or provides access to an increasingly popular form of media (internet service providers) or just makes shiny stuff (precious metals) that holds its value or enables you to fix your car (auto parts stores) and defer purchasing a new one, then you are probably a market leader.

If the above does not apply to you, but instead you are levered to commodity prices or depend upon discretionary consumer spending or bare the scarlet letter of being affiliated with some aspect of the financial services industry, then you are probably one of the market’s biggest losers.


The above briefly sums up the quarter. For a closer look, please refer to the data summary tables below. (Click to enlarge)

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