The global equity market correction continued today, with the Dow Jones Industrial Average losing 376 points to close at 10,068. The S&P 500 and the Nasdaq lost 3.9% and 4.1%, respectively, wiping out all gains for 2010. Very few stocks were spared, and the Volatility Index, a measure of fear in the market, spiked 30% to close at the highest level since March 2009. U.S. Treasuries enjoyed strong safe-haven buying, as the 10-year Treasury rose over a point to yield 3.21%. The U.S. Dollar declined today as central banks intervened to attempt to stem the Euro’s stunning decline, but the Dollar remains up 9% in 2010.
There is no shortage of negative news driving this correction: European debt contagion fears, Germany’s short-selling ban, slowing global economic growth, and the imminent passage of financial regulatory reform legislation. But regardless of the specific catalysts, investors are shedding risky assets from portfolios, including stocks, commodities, high-yield bonds, and growth-oriented currencies. The recent declines are further proof that the May 6th afternoon plunge was due to the combination of heavy selling and a lack of liquidity, not a “trade error.”
Where are the equity markets headed from here? The chart below shows some key levels on the S&P 500 Index to watch. The market is near the intra-day low of 1,065 during the May 6th plunge, an area where a short-term rally could begin. Below that is the 2010 year-to-date S&P low of 1,044: a breach of this level suggests a new bear market and the potential for an additional 10% decline. Given our belief that the sovereign debt crisis is far from over, we will look to take advantage of any near-term strength to further hedge the portfolio.
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the Funds or any stock in particular, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts.
There are risks involved with investing, including loss of principal. Current and future portfolio holdings are subject to risks as well. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Narrowly focused investments and smaller companies typically exhibit higher volatility. Bonds and bond funds will decrease in value as interest rates rise. High-yield bonds involve greater risks of default or downgrade and are more volatile than investment-grade securities, due to the speculative nature of their investments. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume.
Diversification may not protect against market risk. There is no assurance the objectives discussed will be met. Past performance does not guarantee future results Index returns are for illustrative purposes only and do not represent actual portfolio performance. Index returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index.