Market Insight - April 2012
The broad US stock market, measured by the S&P 500, gained 2.8 % in March and almost 12 % for the first quarter 2012. It was the index’s best start since 1998, and the best quarter since the third quarter of 2009. The Dow added 8.1% for the quarter and the tech heavy Nasdaq gained 18.7%. Smaller stocks, measured by the S&P Small Cap 600, rose11.7%
Fears of a global meltdown have eased, as the European Central bank made over $1.3 trillion of funds available to its members, buying time for a longer term solution to economic problems in Spain, Italy and Greece. International stocks markets continued their recovery from the fear driven atmosphere in mid 2011. The EAFE index of developing markets rose 10.76%, while the emerging market index added 13.7. Investment real estate, measured by the Cohen & Steers Realty Fund, gained 10.54%.
Volatility nearly disappeared in 2012 compared to the last 3 months of 2011, when the markets experienced 36 days with moves of 1%, and 14 days with moves of 2% or more. This year, there have been only 7 sessions when the S&P moved more than 1%, and none with moves of more than 2%
U.S. consumer spending in February posted its best increase in seven months, and consumer confidence rebounded to its highest level in more than a year, despite growing concerns about higher prices at the gasoline pump. Investors have continued, though, to withdraw funds from the equity markets in favor of bonds and fixed income investments.
News on housing has been mixed. Although new home sales in February fell slightly from the previous month, they were up 8.8% year to year. Building permits, an indicator of future housing activity, rose in February to the highest level since October 2008
In December, January and February, the US economy added an average of 245,000 jobs, and another 121,000 in March. Fed chairman Bernanke warned in March that the current surge in job growth is probable unsustainable, and reiterated the Fed’s intention to maintain the current easy money policy for the next two years, although notes of the most recent Fed meeting showed a dwindling support for further Fed bond buying.
Summers 2010 and 2011 redux?
Investors remain a bit gun shy after the summertime collapses of the market in each of the last two years. While fears of a global meltdown have receded, they have been replaced by a legitimate concern over the slowing of business conditions in Europe and China, and its impact on US companies’ earnings. First Q per share earnings growth estimates for the S&P 500 components have dropped from over 15% a year ago, to less than 1% now. Revenue growth is expected to slow as well, from an average of 10.6% over the last 8 quarters to projected 5.6% for first Q 2012.
While the increased optimism is a good thing, markets tend to get a bit oversold in these circumstances. There may be some challenging months ahead, as investors seek to rationalize the recent market surge. We have taken advantage of the recent gains to trim stock allocations back to more normal levels, and continue to use dollar cost averaging as our tactical strategy for adding new money to markets. Reasonable valuations, low interest rates, and slow but steady economic growth, as well as funds moving from low yielding bank investments to stocks and bonds, all provide a positive environment for the globally balanced investor over the longer term.
THE BEDMINSTER GROUP
Investment advisor, Principal