May 2010

Concerns that the financial problems in Greece, Spain, Portugal, and other Eurozone countries, could lead to a new credit crisis caused the S&P 500 to record its worst month of May performance since 1962. The combination of a drop in GDP for the EU region, together with the potential for sovereign debt defaults, weighed on financial markets around the world. Most U.S. stock indexes were down approximately 8%. The yield on 10-year U.S. Treasury notes dropped to 3.29% as investors rushed to the safety of U.S. Treasury securities. The market decline was not unexpected given the challenging economic and political conditions, as well as the strong stock market advance since March 2009. Overall, economic data has been gradually improving as the economy slowly pulls out of the recession. U.S. stocks offer decent value by traditional fundamental valuation measures. Corporate earnings have been somewhat better than expected, and most economists believe that the U.S. economy will continue to recover through 2011. The bond market offers only marginal value, given the exceedingly low interest rate environment. We remain concerned over the potential of rising inflation in coming years.