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Stocks around the world are feeling the effects of a troubled global credit market. The Dow dipped into bear market territory to end the first half of the year and both the Total Market (U.S.) and FTSI All-World Ex-U.S. indexes have served up big declines. We expect stocks to continue to feel pressure until credit markets stabilize and the U.S. housing market bottoms. Lower energy prices could also produce a boost to stocks. Investments related to natural resources have been one of the few areas delivering gains in the first half. Select opportunities based on a global infrastructure build-out, despite slowing economies, may be present. Defensive sectors like healthcare may also deserve consideration.
Slowing growth and higher inflation continue to make headlines in Europe and the U.S. Negative GDP growth has not yet been reported in the U.S. but unemployment has picked up. Participants in the credit markets, bond insurers and rating agencies continue to work through a host of problems related to lax lending policies and excessive risk taking. Lending between banks continues to be tight.
Core prices remain fairly well contained but food and energy prices have shot up dramatically in many countries. The U.S. inflation rate ended the first half of the year at 4.18%. Assets that are positively correlated with inflation (TIPS, Gold, Commodities) performed well in the first half of the year.
Conditions in the residential housing market continue to deteriorate. Potential buyers are holding off due to falling prices. For those interested in making a purchase, rising mortgage rates combined with tougher lending standards are making it tougher to qualify.