After four consecutive quarters of gains for U.S. stocks, the Second Quarter 2010 experienced a sharp reversal. Stocks reached their post-financial crisis peak on April 23, 2010, but by the end of the quarter the S&P 500 had given back any gains for 2010 and was down 6.7 percent for the year. Stock markets around the globe declined as concerns about the prospects of a global economic recovery intensified. The U.S. is still facing sluggish jobs growth and a faltering housing sector recovery. Misgivings about Europe’s ability to handle the Greek debt crisis, Asia’s slowing economic growth, as well as the unwinding of global economic stimulus measures, propelled a correction in international markets and also negatively impacted the U.S. stock market.

The Dow Jones Industrial Average returned -9.4 percent for the second quarter. The S&P 500 Index, a broader-based proxy for large cap stocks, lost 11.4 percent, ending near an eight-month low. While stocks were down across the board, small and mid cap stocks outperformed large capitalization stocks. Growth stocks declined slightly more than value stocks amongst large and mid cap stocks, but small cap growth stocks outperformed small cap value stocks. Small cap growth stocks were the best performers of the domestic equity market, down -9.2 percent per the Russell 2000 Growth Index. Overall, the Russell 2000 Index, a broad measure of small-cap stock performance, was down 9.9 percent for the second quarter, and outperformed the large cap Russell 1000 Index, which posted a -11.4 percent return. The growth component of the Russell 1000 returned -11.8 percent, while value stocks were down -11.1 percent. All economic sectors posted negative returns. Materials, financial and energy suffered the worst declines, returning -15.3 percent, -13.3 percent, and -12.6 percent respectively, while defensive sectors, such as utilities, and telecommunication services, held up best during the second quarter, down 5.0 percent and 3.9 percent.

The MSCI EAFE Index, which measures stock performance in foreign developed markets, posted a -13.7 percent return for U.S. investors. Concerns about economic issues in the Euro zone, including sovereign debt and faltering growth expectations, dampened returns for Europe, which was down 14.8 percent. The closely-watched China market was down 4.5 percent. Emerging markets, as represented by the MSCI Emerging Markets Index, fell 8.3 percent.

Unlike stocks, bonds responded positively to signs that the U.S. economy might be facing slower growth than previously expected. As investors moved into Treasuries, yields dropped sharply and prices posted healthy advances during the quarter, with the largest gains occurring in longer maturities. Overall, investment grade fixed income returned 3.49 percent per the Barclays Capital U.S. Aggregate Index. Investors in three-month Treasury bills continued to earn miniscule returns, 0.04 percent, for the quarter. In a reversal from previous quarters, risk-averse investors avoided high-yield bonds and the Barclays Capital US Corporate High Yield Index, an index of sub-investment grade bonds, posted a -0.11 percent return.

Heightened investor fears, that the economic recovery may not be as strong or as soon as expected, resulted in a tumultuous second quarter. Wary investors once again fled to safety. As long as the larger economic environment remains uncertain, investor sensitivity to bad news will remain high and will continue to be reflected in increased volatility in the market.