The second quarter proved difficult for many investment strategies across several asset classes. Worries about a double-dip recession impacted both developed and emerging markets; concerns stemmed from fears about sovereign debt risk and the likely fiscal contractions that will be necessary to manage sovereign debt levels. Developed nations cannot avoid slower growth as higher taxation, lower government spending, and a growing retiree population pressures GDP. Spikes in volatility in May and June impacted equities, currencies and, in a positive fashion, treasuries.

After a strong start to 2010, equity markets in North America sold off in the second quarter with the TSX off 6% and the S&P 500 down by 12%. Fears of a slowing global economy or a double-dip recession sent investors to the sidelines. A number of issues were fueling these fears during the quarter. A handful of European countries, led by Greece, saw their debt downgraded, raising fears that the Euro and the European Union may be on the verge of collapse.

It was a brutal quarter, despite the fact that the Fund held well over 20% cash. What happened? First, we did not have much of a gold weighting, as we liquidated much of our holdings in the first quarter. Second, our small-cap, non-resource stocks have been hit hard as liquidity and activity dried up. Third, we started to buy metal stocks too early, despite an already 30% drop. Finally, we found that holding cash really provides an opportunity rather than a defensive strategy. As such, for the quarter the fund was (11.75%) versus the S&P/TSX (6.17%) and the Dow (9.97%).

Overview

Stock markets in North America continued to show the strength they exhibited last year in the first quarter of 2010. Gains were bolstered by a stabilizing housing market, stronger employment numbers and increasing consumer confidence. For 2010, the IMF is now predicting global growth of 3.9%, with China approaching 10%. This growth has led many commodities to continue their upward climb from last year. Although interest rate hikes are expected later this year off historic lows, it is typically rate increases much further into an economic cycle that cool down the resource sector.

A satisfactory quarter for the markets and the economy, despite all the doomsayers.

In fact, economic activity is picking up, particularly in North America, with the continued stabilization of the housing market, an improving stock market, and rising consumer confidence. Looking at the components of the Purchasing Managers Index (PMI), which represents a close snapshot of intentions and activity in the industrial sectors, we see good visibility ahead, and that momentum is clearly on the upswing, a positive contributor to the recovery.

Where are the green shoots?