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After the sustained selloff in previous trading sessions, the markets rallied Fr iday to claim a strong gain for

the week. The S&P and Dow both booked a 0.8% gai n, while the Nasdaq rose 1.0%.[1] With the choppy market performance and gloomy economic sentiment weve seen in the past weeks, we wanted to spend some time disc ussing recent trends and what they might mean for the future. In short, many of the problems that plagued the markets in 2010 and 2011 a serio us European debt crisis and recession, a slowing Chinese economy, slow domestic growth, and the looming expiration of Bush-era tax cuts are still with us in 201 2. The uncertainty around these issues has dealt investor sentiment a major blow and spurred an exodus from equities into bonds and other safe haven investments, pushing Treasury yields to record lows similar to levels seen in the 2008 crisis . Theres a real current of fear underlying these moves that the global economy is slipping back into recession. Whether this fear is realized depends largely on how the credit crisis in Europe develops. Things may be looking up (at least tem porarily) as Eurozone leaders have pledged to lend Spain up to 100 billion euros (approx. $125 billion) to recapitalize its banks, pending an audit this month. By pumping more liquidity into the economy, policymakers have bought themselves a bit more time to find a solution.[2] We hope that markets will react positivel y to the news this week. Domestically, many people are worrying about whether 2012 will be a repeat of th e last two years, where an initially promising start fizzled out in the spring. Economic data has been patchy at best, and employment growth seems to have lost steam over the past few months, with not nearly enough jobs created to sustain c ontinued growth. At this point, we cant be sure if this is just a temporary slowd own or a sign of continued economic contraction. Based on a number of factors, w e currently suspect that this is a temporary, cyclical slowdown and that job gro wth will pick up in the latter half of the year. Supporting this belief, the Feds most recent Beige Book report stated that U.S. economic growth picked up over t he last two months, and hiring showed signs of a modest increase, indicating that the situation is not as grim as many originally feared.[3] With respect to equity markets, we know that historically, the market suffers on e 10% (or greater) market correction each year. The S&P briefly touched an intra day correction of 10%, so does that mean we can expect solid growth going forwar d? Its impossible to know for sure, but its rare to see the kind of persistent sel ling pressure that weve seen for the last month, where, for example, the Dow expe rienced 17 losses in 22 trading sessions. This lingering weakness has resulted i n very pessimistic investor sentiment that may set markets up for a positive reb ound. Additionally, were also under the effect of typical Presidential Election y ear trends, which historically have called for a peak in April and a decline on June, a script the markets have followed closely this year. If the cyclical tren d continues, we can expect a new burst of energy in the second half of the year.

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