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Monday, June 6, 2011

Update: Spring Slump

by Matt Malick

Last week, the Standard & Poor's 500 Stock Index fell 2.3% to cap a five-week losing streak, the longest since July 2008. Overall, the market has fallen 4.7% from its April 29, 2011 three-year high of 1,363.61. Meanwhile, the S&P Goldman Sachs Commodity Index has fallen 8.4% from its April 8, 2011 high.

Treasuries, on the other hand, have flourished. The price of the two-year has risen each of the last eight weeks with the yield falling to 0.43%, the lowest level since November 9, 2010. Meanwhile, the ten-year benchmark bond has once again fallen below 3% to yield 2.99%.

Given the tense negotiations between Republicans and Democrats over the near-term debt ceiling limit and long-term structural deficit problems, people are only willing to accept these low yields as a “safe haven” investment (return of capital instead a return on capital).

Clearly, recent economic indicators ranging from employment to manufacturing activity have demonstrated an economy that has slowed.

We wrote on April 15, 2011 in The Hijacking of Ben Bernanke that “we disagree with some analysts who anticipate continued commodity inflation as far as the eye can see. We fear that a sustained rise in food and gas prices will stall the nascent recovery, leading to another economic slowdown that would itself drive down commodity prices.” In our view, this is exactly what has come to fruition.

Given the level of pessimism among investors and market pundits and the reasonable valuation of stocks (Bloomberg data calculates the S&P 500 trading for 14.8 times earnings), we still believe we are in the midst of a multi-year bull market. The recent pullback is most likely a healthy breather for a market that has avoided a noticeable correction for too long.

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