14 Jul 2012 Dodge & Cox - Q2 2012 Commentary ( Portfolio )
After a strong first quarter, the S&P 500 fell 2.8% during the second quarter of 2012. Market returns during the quarter were characterized by an increase in volatility, as macroeconomic concerns continued to weigh heavily on investors. Although first quarter estimated GDP growth was revised down to 1.9%, the modest U.S. economic recovery continued. Unemployment declined to 8.2%, inflation and interest rates remained low, consumer credit expanded, and home prices rose. Corporate earnings continue to grow faster than stock prices, which we believe has created compelling valuations for stocks. On June 30, the S&P 500 traded at 13 times forward earnings.

European uncertainty has contributed to investor anxiety regarding economic and political concerns around the world. The growth previously seen in some emerging markets—such as China, India, and Brazil—has slowed. The decline in oil prices has negatively impacted the health of those emerging markets dependent on oil revenues, such as Russia, though it has been a benefit to the U.S. consumer. Political turmoil in the Middle East also continues to feed uncertainty. Closer to home, fear-based investing has caused a “flight” to perceived safety, and the yields on U.S. Treasuries are at all-time lows.