July Market Review

The S&P 500 rose 1.3% and the Dow Jones Industrial average fell 1.1% in July.

10-year US Treasury bonds returned 1.0%.

30- year US Treasury bonds returned 2.3%.

Healthcare and Utility sectors led the way again returning 1.9%.

Gold was up 1%.

Crude oil prices rebounded 3.1%.

These returns give the appearance of a low volatility month.

It was, however, anything but.

In mid-July the European market seemed to be on the verge of unraveling. The Spanish 2 year note yield hit 6.6%. Spain’s debt to GDP ratio is now an astonishing 363%. With 2-year notes at close to 7%, the market was hinting, on July 24th, that they are coming close to shutting Spain off from funding itself via the bond market. Meanwhile the S&P 500 had fallen 5 days in row. China’s Shanghai Composite Index hit its lowest level since March 2009 due to slowing exports to the developing world (mainly Europe). March 2009 was the nadir of the financial crisis.

Enter Mario Draghi, the European Central Bank Chairman, who stated the “Central Bank will do whatever it takes to save the Euro.” “Whatever it takes” means more “easing,” or as some would call it, “money printing.” The markets took Draghi to mean that the ECB would buy more European government debt. This purchase would probably bring yields down on Spain’s debt allowing Spain to fund themselves in the markets. This probability sent stocks roaring back to finish the month up over 1%.

Why Dividends Matter

The S&P 500 closing level of 1380 on the last day of July 2012 was level first crossed in July 1999. We now know that the index level over this period was flat, in other words, your price return was virtually 0%. Over that period the total return of the S&P 500 was 38 % or 2.4%. Where did the return come from? The reinvestment of dividends!