Market Insight - March 2012

Although the Dow slipped back from 13,000 on the last day of February, it marked an exceptional two months for both stock and bond markets, one of the best year beginnings in decades. Ten year treasury yields slipped below 2%, boosting bond prices, while equities continued to add momentum from their 4q 2011 relief rally. The Dow and S&P 500 gained 6% and 8.5% respectively, while smaller US stocks, measured by the S&P Small Cap 600, were up 8.9%. The MSCI Emerging Market index gained 16.8%, and the Developed Market index rose 10.3%.

Investors now seem less concerned that European debt problems will spill over to the US and wreak havoc here. Unemployment numbers have fallen for 5 months in a row, and the economy has been averaging a net gain of 200,000 jobs each month since November. Despite rising gas prices, consumer confidence is at its highest level in a year.  Corporate earnings for the last three months of 2011, while not as strong as expected, still beat analysts’ estimates handily.

Fed Chairman Bernanke’s comments at the end of February reiterated their intent to maintain low short-term rates through 2014, but with one caveat. If the unemployment rate, now at 8.3%, continued to fall more quickly than anticipated, the Fed’s economic assumptions would be subject to review.  No mention was made of a third round of quantitative easing, which was a little disappointing to investors.

There is certainly a strong case for good returns from stock markets this year, but we are always reminded that markets ebb and flow as they move; and summers have been an unhappy season for stock investors, at least the last two summers. A five to eight percent pullback in the S&P 500, to the mid 1200’s, is very likely, but we think it unlikely to spook the markets. In fact, we anticipate these declines will trigger strong buying support as investors on the sidelines look to put funds to work from the massive amounts sitting in money markets and short term CDs. It’s a pretty good bet that the market’s summer storms will coincide with another chapter in the Euro-saga; given the breadth and severity of the problems there, investors’ sense of relief seems a little overdone.

Yours truly,


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