Will
the market gains continue?
Equity
markets experienced one of the best first quarters in years, with the Dow
logging its strongest quarter since 1998.[i]
After flirting with record highs for more than a week, the S&P500 finally broke
through its 2007 ceiling to close at a new high of near 1,570. For the quarter,
the S&P500 gained 10.03%, the Dow increased 11.25%, and the Nasdaq closed up
8.21%.[ii]
What are some of the factors that contributed
to the strong market performance we’ve experienced?
Federal Reserve Stimulus
Policy
Many
analysts agree that the Fed’s quantitative easing policies of rock bottom
interest rates and bond purchases have played a significant role in the market
surge. With 2012’s QE-infinity program, the Fed essentially promised to
continue to buy bonds until unemployment falls below 6.5% (as long as inflation
remains tame); this aggressive action gave investors and business leaders
confidence, boosting stock and asset prices and increasing consumer spending.[iii]
Robust Domestic Economic
Performance
While
markets have certainly benefited from Fed policies, there are solid economic fundamentals
underpinning much of the recent performance investors have experienced. The
U.S. economy is humming along, and there’s reason to hope for strong first
quarter GDP growth. Some forecasts put Q1 GDP growth as high as 3.5%, which is
a significant improvement from the 0.4% growth we saw in Q4 2012.[iv]
The
housing market was a major contributor to economic and market performance last
quarter. Housing prices are increasing across most of the country, and a
February report shows that permits for future construction increased at the
second-fastest pace seen since June 2008.[v]
Unemployment has also seen some recent improvement, with the latest report
showing that jobless claims decreased in 22 states while wages increased in 42
states, yielding an unemployment rate of 7.7% in February.[vi]
Overall, the economy still has a ways to go before it can be considered fully
recovered, but the trends indicate that the recovery is continuing at a strong
pace.
What factors could spark volatility in the weeks and months to come?
Uncertainty Around Sequestration Debates
While investors have largely shrugged off concerns about the federal budget sequestration that was triggered on March 1, we expect the impact of government budget cuts to drag on markets in the coming quarter. If lawmakers do not come to an agreement, federal spending will drop by more than $40 billion by the end of the year. While we are hopeful that an agreement will be forthcoming once the full effect of sequestration cuts is felt, the uncertainty around the current political stalemate may cause additional volatility.
Turmoil in Europe
The Eurozone debt and economic crisis remains of deep concern to analysts and investors. While the Cyprus banking situation was resolved with a 10 billion euro loan by raiding depositors’ bank accounts, EU officials have set a bad precedent that may have long-term effects on their banking sector.[vii] The IMF issued a recent report warning that ongoing political wrangling and piecemeal bailouts are threatening the stability of the Eurozone and that cooperative, comprehensive action was needed.[viii] Currently, both Italy and Spain are close to needing bailouts, as interest rates on their debt is rising to untenable levels and the political leadership in each country lacks the credibility necessary to push through needed reforms.
Looking Ahead
It’s important to keep market milestones in perspective; while we are very pleased that the economy is steadily improving and markets are doing well, we know that the music will stop sometime. In the days and weeks to come, markets may experience volatility as investors take profits and wait for good news. Historically, markets have often underperformed in the second quarter after a big first quarter.[ix] Analysts will be closely watching first quarter earnings reports and economic data, along with monitoring Europe for clues on which way the market will go. However, if economic fundamentals remain solid, markets may experience further upside.
While we continue to remain optimistic about market performance in 2013, we advise our clients to expect some bumps in the road. If you have any questions about your investments or how your portfolio should be positioned for the rest of 2013, please don’t hesitate to contact us. We are always delighted to be of service to you and your family.
ECONOMIC CALENDAR:
Monday: Motor Vehicle Sales, PMI Manufacturing Index, ISM Mfg. Index, Construction Spending
Tuesday: Factory Orders
Wednesday: ADP Employment Report, ISM Non-Mfg.
Index, EIA Petroleum Status Report
Thursday: Jobless Claims
Friday: Employment Situation, International
Trade
HEADLINES:
Wealthy Cyprus account-holders will lose more than
feared. Big
depositors in Cyprus’ largest bank will be given shares in the bank worth 37.5%
of their deposits over 100,000 euros under the terms of the EU bailout deal.
The rest may never be paid back.[x]
Public pensions reach highest holdings since 2007 peak. U.S. public pensions reached a major
milestone in fourth quarter 2012 when assets in the 100 largest funds reached
their highest level since the fourth quarter of 2007, just before the 2008
financial crisis.[xi]
Fourth quarter GDP revised. The U.S. economy grew at a faster pace
than originally estimated due to a bigger gain in business spending and a
smaller trade gap. The revised estimate shows that GDP actually grew by 0.4%,
up significantly from the original estimate of 0.1%.[xii]
North Korea announces intention to enter “state of war”
with South Korea. In
a sign of further deterioration in international relations between the two
countries, officials in North Korea’s capital ratcheted up the warlike
rhetoric. Although U.S. diplomats stated their intention to take the threat
seriously, North Korea has a history of engaging in provocative threats.[xiii]
QUOTE OF THE WEEK:
”You need to go beyond the ideas of
succeeding and failing, for these are judgments. Stay in the process and allow
the Universe to handle the details.” Dr. Wayne Dyer
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Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
Diversification
does not guarantee profit nor is it guaranteed to protect assets
The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
The Dow Jones Industrial Average is a
price-weighted average of 30 significant stocks traded on the New York Stock
Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896.
The MSCI EAFE Index was created by Morgan
Stanley Capital International (MSCI) that serves as a benchmark
of the performance in major international equity markets as
represented by 21 major MSCI indexes from Europe, Australia and Southeast
Asia.
The 10-year Treasury Note represents debt owed by the
United States Treasury to the public. Since the U.S. Government is seen as a
risk-free borrower, investors use the 10-year Treasury Note as a benchmark for
the long-term bond market.
Google Finance is the source for any reference to the
performance of an index between two specific periods.
Opinions expressed are subject to change without notice
and are not intended as investment advice or to predict future performance.
Past performance does not guarantee future results.
You cannot invest directly in an index.
Consult your financial professional before making any
investment decision.
[i]
http://www.cnbc.com/id/100600350
[ii]
Source: Yahoo Finance
[iii]
http://finance.yahoo.com/blogs/daily-ticker/fed-speaks-soon-join-conversation-173742166.html
[iv] http://www.latimes.com/business/money/la-fi-mo-economy-gdp-20130328,0,1187790.story
[v] http://news.investors.com/newsfeed-marketwire/032913-141456793-homebuilders-impressive-rally-continues-in-2013-as-housing-market-shows-no-signs-of-slowing-down.aspx
[vi] http://www.usatoday.com/story/money/business/2013/03/29/feb-state-unemployment-rates/2034439/
[vii]
http://www.telegraph.co.uk/finance/financialcrisis/9952979/Cyprus-bail-out-savers-will-be-raided-to-save-euro-in-future-crises-says-eurozone-chief.html
[viii]
http://www.cnbc.com/id/49367873
[ix] http://www.cnbc.com/id/100598590
[x] http://www.cnbc.com/id/100604179
[xi] http://www.reuters.com/article/2013/03/28/usa-states-pensions-idUSL2N0CK18O20130328
[xii] http://www.businessweek.com/news/2013-03-28/economy-in-u-dot-s-dot-expanded-at-revised-0-dot-4-percent-pace-in-fourth-quarter
[xiii]http://www.reuters.com/article/2013/03/30/us-korea-north-war-idUSBRE92T00020130330
