Cornerstone Wealth Advisors Inc.

THE CORNERSTONE INVESTMENT UPDATE: 2nd Quarter 2010

It seems that global equity markets got a bit ahead of themselves, even as bond and money markets continue to paint a realistic and helpful picture of the current economic climate.

Most importantly, things are not as bad as the recent quarter’s declines (and the ‘expert’ commentaries about them) would have us believe … just as they weren’t as good as the meteoric gains that extended through March implied. Unfortunately, most of the economic growth of the past year was funded by the stimulus plan via tax cuts, aid to state governments which avoided further layoffs, extensions of unemployment benefits and those ‘shovel-ready’ public works projects. As their expirations unfold, ‘stimulating’ economic activity from consumers (spending) and businesses (hiring and expansion) is not yet there to pick up the slack. Interestingly, the unemployment rate of those with a college degree is less than 5% while being over 15% for those with no more than a high school diploma. Furthermore, the emotions of markets often swing like pendulums: Big swings in one direction ultimately go too far before setting off (slightly less) big swings the opposite way. Thus, it seems like roughly two-thirds of the economy is slowly recovering while the rest is still experiencing really tough times.

Also noteworthy is what is nothappening. The European debt crisis has not spread to the healthy countries of Europe, yet alone beyond. Should a country default on its debt, it would be catastrophic for them – for a while – but likely not for the rest of the world. In fact, U.S Government bond prices and the dollar have all been rising over the past year even as these events unfolded. Were things as bad as some postulate, this would not be true. In addition, inflation is nowhere on the horizon.

Regarding your portfolio this past quarter, value stocks continued to outperform growth stocks as is often the case at this stage of a recovery. Foreign stocks suffered most due to Europe’s economic woes but also from the rise in the dollar; not unexpectedly, foreign small cap stocks and our emerging market emphasis held up far better. On the fixed income side, our dollar-denominated government and short-term bonds continue to both perform well and provide a significant cushion of assets we expect to be largely unaffected should the much talked-about double-dip recession actually occur. Much of the recovery in high-grade corporate bond prices seems to have run its course, so we will sell 2/3 of these bonds (Vanguard Short-Term Corporate – VFSTX) and replacing it with the Vanguard Short-Term Federal Fund (VSBGX) or the Sit U.S. Government Fund (SNGVX) for smaller positions.

We remain pleased with how your portfolio is weathering the aftermath of the economic crisis. We have always wondered how many clients read this quarterly update, so we’d greatly appreciate your emailing us if you are! As always, we thank you for the continuing opportunity to work with you.