January 2011 – Market Commentary

Overview
-January saw stock markets continue to surge forward. Strong corporate earnings reports buoyed stocks throughout the month before unrest in the Middle East tempered performance.  Stock markets still ended the month at highs last seen in the summer of 2008 as investors moved out of fixed income with increasing confidence in the market.  Several improving economic reports were also released improving confidence in the economy.  However, the Fed believes it is necessary to continue stimulating the economy with the bond buying program.  Economist project a growth rate of 3.2% for the US in 2011, however global inflation is becoming a concern amongst the loose money policies.

Economic News
-The unemployment rate dropped to its lowest level in 19 months in December reaching 9.4% with roughly 103,000 jobs added.  The significant drop in the unemployment rate was also due to a large number of people no longer looking for work and were therefore not considered unemployed.  The current amount of jobs being created is not enough to bring about a sustained job recovery and is barely enough to keep up with population growth.  Closer to 200,000 new jobs a month would be needed for lasting improvement

-Sales of new and existing homes rose in December, but are still very low compared to historical standards. Although sales improved, prices in all 28 major metro areas fell in the 4th quarter compared to a year earlier.  The housing market is expected to pick up in 2011 according to housing economists, however home builders are not optimistic about the US home outlook despite improvements in other areas of the economy.  On the commercial side, conditions are beginning to improve as occupied office space in the U.S. rose in the 4th quarter for the first time in almost 3 years and rents rose as well.

-Numerous economic readings continued to tick up in December to show positive signs for the economy.  Although retail revenue fell short of estimates for December, the 2010 holiday season still finished with the best retail revenue growth since 2006.  In December consumer confidence rose to its highest level in 8 months and capital spending, manufacturing, factory output, and auto sales all rose.

-Global inflation concerns are growing on rising raw materials prices.  Brazils’ inflation rate is up to close to 6% and China’s is close to 5%.  Inflation surged past the ECB target for the first time in over 2 years in the Euro-zone with inflation up to 2.4% in January.  Jean-Claude Trichet, the president of the ECB, signaled the bank would consider raising rates to combat the inflationary pressures despite the continued weakness in some European countries.

Corporate News
-It was an active month for internet and computer related companies.  Linkedin announced it will go public and Facebook revealed it would likely go public in 2012.  They also raised an additional $1.5 billion in a highly publicized deal from private investors.  Current Google CEO Eric Schmidt will step aside and co-founder Larry page will assume the CEO position in the biggest shake up of leadership at the largest web company since it was a small start up.  Steve Jobs, CEO of Apple, is taking another indefinite leave of absence from the tech giant over health concerns.

-Verizon announced it would begin selling the iPhone in February ending AT&Ts exclusive rights to the smart phone since 2007.

-More than half of U.S. Companies have reported earnings for the fourth quarter and the results have been very positive with 2010 likely being the third best year for profits since 1998.  S&P believes fourth quarter earnings will grow 32% from a year ago.  Some of the firms reporting strong profits include Alcoa, Intel, JP Morgan, Apple, IBM, American Express, Yahoo, and Exxon.

Market News
-The New Year was rung in with fireworks on Wall Street as news of worldwide factory activity increases pushed global markets up.  Markets moved steadily upwards over the course of the month and the Dow and S&P 500 flirted with 12,000 and 1,300, respectively, before the increasingly unsettled situation in Egypt spooked markets and curtailed some of the gains to end the month.  However, stock indices still reached fresh two and a half year highs over the month.  Strong corporate earnings reports buttressed much of the month’s performance. The Dow ended the month up 2.9% and the S&P 500 advanced 2.4%.  Value outperformed growth in the majority of market caps and in a reversal of recent trends large cap stocks beat small cap stocks.  International markets saw developed markets have solid performance up 2.4%, however emerging markets struggled and were down -2.7% over Middle East concerns.

-With encouraging signs showing in the markets and worries about China raising interest rates gold tumbled over the month. It had its worst month since late 2008.  Oil moved over $90 a barrel for the first time since the credit crisis as fears over issues in Egypt could spread and cause supply disruptions.  Global harvest estimates were cut by the USDA and they increased some forecasts of demand raising the potential for food price increases.

-Bonds saw mixed performance as investors interest in less risky assets waned in January. Performance was mostly up for Treasuries, Corporates, and Agencies with intermediate terms seeing the best results. On the downside Munis continued to struggle across all terms and international bonds were down as European debt worries continue to linger.  Yields on the 10 year treasury marched upwards ending January at 3.42%.

Index Performance – January

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Raffa Wealth Management is an independent investment advisor providing nonprofit organizations and high net worth individuals with a full range of investment consulting services.  We were established to fill the need for transparency, clarity, and vision in the professional management of investment assets.   Visit us at www.raffawealth.com.

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