At the end of the first-quarter of this year, we remarked that the market was still willing to shrug off the storm clouds over Europe and the rocky recovery in the United States to post impressive gains. Three months later, the market's patience seems to be running out. Concerns about everything from the future of the euro, to Chinese economic strength, to the U.S. jobs picture, and the impact of elections across the globe turned sentiment, and stocks, lower in the second quarter. The Morningstar U.S. Index dropped 5.7% during the last 13 weeks. It is now up 5% during the last 12 months and has returned an annualized 16% during the last three years.
Europe was a primary area of concern in the second quarter. Greece remained a hot spot, particularly after inconclusive elections in May. After no party was able to form a coalition, fears mounted that a new election in June would lead to a new government that would repudiate existing bailout agreements and quickly force Greece out of the eurozone. The eventual election of the conservative New Democracy party in June soothed fears of a rapid exit, but concerns over the long-term stability of the country remained. Borrowing costs in Spain skyrocketed during the quarter over fears, which then became the reality, of a large bailout needed to keep the country's weak banking sector afloat. As the quarter closed, European leaders were set to discuss major reforms to the eurozone, including the possibility of a closer fiscal union and mutually assured debt.
In the U.S., the economic data that looked strong in the first quarter was decidedly less cheery in the second. Poor jobs data, in particular, spooked the market. But the big swing in data might be somewhat misleading. As Morningstar's Robert Johnson explains, unseasonably warm weather and seasonal adjustment factors likely made growth seem better than it was in the first part of the year. And now that those trends have reversed, growth seems lower than it actually is. Johnson sees the economy as being stable, expanding in the 2.0% to 2.5% range.
