Market Insight - April 2011
This was the best first quarter return for the Dow in over two decades, yet the circumstances of the last three months seemed an unlikely backdrop for gains in the financial markets. Global tensions increased as events in the Middle East took an unexpected turn, and added to turbulence in an already volatile and dangerous region. In February President Mubarak of Egypt was ousted from power by the army and a youth revolution, fueled in no small part by social media and cell phones. The US, along with its NATO allies, undertook a military action in Libya, establishing a no-fly zone, the outcome of which is still very uncertain. An increasingly contentious Congress continues to flirt with a government shutdown over budget issues, and the shocking events in Japan on March 11th were both an ongoing humanitarian disaster, and an ominous reminder of the potential dangers of nuclear power. The dollar continued its decline against the Euro, a currency that had been declared on life support last May.
Smaller U.S. stocks led the way, with the Russell 2000 gaining 7.6% for the quarter, and the S&P Small Cap 600 adding 7.4%. The Dow, powered by gains in the major energy producers, rose 6.4%, leading the major averages of large cap stocks. Oil prices closed the quarter at $106.72/barrel, a rise of over 16%. The S&P 500 added 5.4% and the NASDAQ gained 4.8%.The real estate investment trust sector continued its winning streak; The Cohen and Steers Realty ETF (ICF) rose 6.7%. International markets lagged behind, despite the steep 5.7% decline of the dollar, with the MSCI developed market index gaining 3.2%, and the emerging market index 2.2%.
Volatility has returned; in March alone we experienced 16 days with more than triple digit moves both up and down in the Dow, and we expect more of the same as we move into the summer. While markets have been responding to global events in real time, investors remain impressed by the increasing strength of the U.S. recovery and the gradual whittling down of the unemployment rate. Sovereign debt problems in the Eurozone remain serious but under control, although this could change at any time. Stock market valuation in the US is reasonable, and earnings results seem to justify a modest rise in PE ratios and stock prices in the near and intermediate term. Expectations have been raised, though, in almost every area except home prices, and the possibilities for disappointment and a meaningful correction of the market this year seems more and more likely. The Fed's quantitative easing program, QE2, is set to end in June; equity markets could swing either way, as the positives of a stronger economy could easily be offset by the negatives of higher short term interest rates. However, as in 2010, a mid-year slump in stocks does not necessarily translate into poor results for the year. We see mounting evidence of frustrated savers moving funds from CDs and money markets into stocks; this suggests to us that we are somewhere in the midpoint of this market cycle. We continue to use this strength to rebalance and normalize stock allocations that have expanded in a rising market , and remain very comfortable doing so at this point.
Steven I Weber, Investment Officer
The Bedminster Group