Much has happened this quarter and we’re barely past the midpoint. France elected a Socialist; Greece can’t elect anyone; JPMorgan, the most vocal opponent of the Volcker Rule, had a massive trading error; and, Facebook, the social media giant, came to market with a $16 billion initial public offering that left a bad taste in the mouth’s of individual investors as it appears (ironically, since we are talking about a social media company) that certain information wasn’t shared with them (mostly Facebook users) that was shared with some institutional investors. Unfortunately, the second quarter of 2012 has not been kind to equity investors as the MSCI All-Country World Equity Index is down over 9% through the first 8 weeks of the quarter. Of course, that same index was up over 12% in the first quarter, bringing the compounded year-to-date return to a meager 2%. Domestic large cap stocks (S&P 500) have held up the best in this sell-off—only down 6%, whereas Emerging Market stocks have been the hardest hit—down 12.8%, followed closely by Developed International Stocks—down 11.9%. Bond investors have fared somewhat better: international sovereign debt is down 0.8% (primarily due to the strength of the US dollar), high yield corporate bonds are down 0.4%, investment grade corporate bonds are up 0.5% and U.S. Government debt is up 1.3%.

The sell-off has been fueled by multiple factors. Domestically, economic indicators are pointing toward sluggish growth and the improving employment picture, which drove the 6-month rally in the markets, has once again slowed down. Internationally, the European sovereign debt crisis has reared its ugly head again; and, the Chinese economy has slowed significantly. The most significant of these, primarily due to the potential domino effect it could have, is the European sovereign debt crisis. Greece, the Michael Myers (Halloween movie franchise) of the European Union—it simply won’t die and keeps returning to wreak more havoc, has no government and no consensus on whether to stay in the Euro (accept the austerity measures in exchange for loans from the International Monetary Fund and the European Central Bank) or leave. As a result, Greek banks have experience a run, as depositors would prefer to have their Euros held by more stable and viable financial institutions. This is where the domino effect comes in. Should Greece finally go, what’s to prevent Spanish, Italian, Portuguese and Irish depositors to have the same run on their banks? Some of this is already taking place. These same European banks are also the largest lenders to the emerging market economies—if their deposits decline, their loan portfolios also must decline. If the emerging market economies slowdown as a result of a reduction in available capital, it will have a direct impact on the US economy. As a result, the key to any resolution to the European sovereign debt crisis will be the containment of the fallout. An orderly Greek exit from the Euro is probably in everyone’s best interest provided there is a simultaneous backstop put in place to prevent the contagion from spreading to the other periphery European nations. Such a backstop could take the form of Eurobonds to replace individual sovereign credits, but thus far Germany has been opposed to such a plan (can’t really blame the Germans since they would be on the hook for others’ bad fiscal behaviors). In any event, as we’ve noted in previous commentaries and market updates, we think there are several more acts to this play.

Things look considerably better here at home. Over seventy percent of S&P 500 companies reporting first quarter earnings beat analysts’ estimates; reduced global growth expectations has caused the price of crude to decline nearly 20% over the past several months which has US consumers feeling more confident; and, the housing market appears to be finding a bottom. That said, we are still dependent upon our politicians to get their act together and address the debt ceiling and related domestic fiscal issues between now and the end of the year. Therefore, we remain cautious in these volatile times.

Our client portfolios have held up well in this environment. They advanced much more than market benchmarks in the first quarter and have declined much less so far this quarter as we proactively reduced risk exposures in March and April. Our two Telemus Funds, which are designed to get at non-traditional fixed income streams in a hedged vehicle, have performed remarkably well. We matched market benchmarks in the strong first quarter (up 6%-7%) and we’re flat so far this quarter, whereas market benchmarks are down 4%-5%. Much of our ability to protect downside in these types of environments is enhanced due to the fund structure, which allows us to be more creative and nimble in constructing our market hedges.

Enjoy the long weekend and please take time to remember the real heroes, the ones who gave their lives defending our freedom, on our Memorial Day holiday.