Market Commentary: May 2008
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Capital Markets The equity market responded positively in April, as evidence mounted that the U.S. economy avoided an outright contraction in the first quarter. April’s solid performance built on the momentum from March’s interest rate cuts and the Bear Stearns rescue. From the market open on March 17 after the “Bear Stearns weekend” through April 30 the S&P 500 returned 7.7%. On a year-to-date basis, equity returns remain in negative territory.
The continued softening of the Dollar has benefited U.S. based global investors. The weak Dollar has propped up international equity returns year-to-date as compared to performance denominated in local (foreign) currencies. While the greenback remains generally weaker thus far in 2008, it showed signs of strengthening in April.
Source: PMFA Volatility has continued to decline since peaking in mid-March. However, we anticipate market sensitivity to continue until greater clarity surrounding the economic outlook is achieved.
VIX - CBOE S&P Market Volatility Index – History 
Source: Yahoo Finance The fixed income market evidenced investors’ willingness to assume more risk in April. In general, the broad indices posted nominal losses for the month. The standout performer for the month was the High Yield segment in which spreads narrowed, leading to positive returns. However, the category continues to trail other fixed income segments year-to-date. After significant disruptions in the municipal markets earlier this year, their year-to-date performance recovered on a relative basis and now slightly trails that of their taxable counterparts.
Source: PMFA Alternatives experienced mixed results in April. The Wilshire REIT Index enjoyed a recovery after a year of relatively steady decline. Commodities continued to thrive with strength in the energy and agriculture sectors, caused in part by a soft dollar, supply disruptions, and speculative elements within the market. Precious metals remained very volatile, with gold ending the month down 4.3%.
Source: PMFA Economy GDP The advance estimate for Q1 GDP growth was a sluggish, yet positive 0.6%. Consumer spending for services, inventory accumulation, exports and government spending were the main positive contributors to growth.
Real GDP & Personal Consumption – Quarterly % Change 
Source: PMFA, Bureau of Economic Analysis (BEA) Earnings for nearly all of the S&P 500 companies have been reported for the first quarter. Estimates anticipate another negative quarter, with the potential for a turnaround in the third quarter of 2008. Earnings have generally trended with GDP on a year-over-year basis.
Nominal GDP & S&P500 Earnings – 12-Month % Change 
Source: PMFA, Standard & Poors, BEA Inflation 
Source: PMFA, BEA, Bureau of Labor Statistics (BLS) Inflation indicators remain elevated. The Core CPI increased by 0.5% in March, bumping the 12-month pace to 2.4%. Core PCE remains stubbornly elevated just above the Fed’s implied comfort zone of 1.0-2.0%.
Inflation Indices – 12-Month % Change 
Source: PMFA, BLS, BEA The Fed continues to project inflation will moderate over coming quarters. Global economic growth is projected to slow, potentially providing some relief in inflationary pressures, specifically in food and energy. A slowdown could also provide the opportunity for other central banks to ease interest rates, which would likely spur a strengthening of the Dollar relative to their respective currencies.
Employment Job growth remained negative in April; however, the decline of 20,000 jobs was markedly smaller than anticipated. The economy has experienced job losses since the beginning of 2008, yet the degree of loss to date has been less severe than what has been often the case during periods of economic weakness. The unemployment rate ticked down to 5.0%.
Nonfarm Payrolls & Unemployment Rate – Monthly 
Source: PMFA, BLS Interest Rates The FOMC reduced the Fed Funds rate by an additional quarter percent in April, bringing the rate down to 2.0%, likely at or near a cyclical bottom. Sentiment has now begun to shift and expectations are that the Fed may be near or at the end of their easing cycle, particularly in light of inflation concerns. The market is currently pricing in no rate change at their June meeting.
Current Probabilities for 06/25/08 FOMC Meeting 
Source: PMFA, Bloomberg The yield curve steepened further during April. Shorter term yields remained virtually unchanged while longer duration yields rose. The ten-year treasury yield ticked higher by 0.32% for the month to 3.77%. The intermediate portion of the yield curve moved significantly in April as the three-year yield increased 70 basis points.
Treasury Yield Curve History 
Source: PMFA, U.S. Treasury U.S. Dollar Since peaking in February 2002, the U.S. Dollar (USD) has declined by over 25% relative to a basket of U.S. trading partners. The decline is even more significant when compared to seven “major” developed country currencies, which includes the Euro and Australian Dollar against which the decline exceeds 40%.
Currency Exchange Indexes – History 
Source: Federal Reserve
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Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other source believed to be reliable. However, some or all information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis non-factual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.
Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.
