March 2011- Market Commentary

Overview

-March was a tumultuous month with stocks losing almost all of their gains for the year before rebounding for the best first quarter for US stocks since 1998.  Unrest in the Middle East and specifically Egypt and Libya made markets pause and have driven up oil prices considerably. Japan was stricken by a massive one-two punch from an 8.9 magnitude earthquake and following tsunami that caused tremendous destruction throughout the country and killed thousands.  With the ensuing nuclear crisis Japanese stocks fell 17.5%, however the market was able to pare losses with foreign aid.  The quarter continued to see strong corporate earnings reports and improving economic conditions highlighted by falling unemployment, which contributed to growing investor confidence in the market.  The improving conditions resulted in continued outflow from fixed income investments into equities despite the several market shocks that occurred.  As a result, fixed income performance was mostly flat for the quarter.  Challenges still abound with the European debt crisis still simmering, the housing market slumping further, food and energy prices rising, and uncertainty over the Fed’s next move.  The recent resiliency of the market will need to continue in order to combat these many challenges.

Economic News

-Growth in the job market has started to gain traction as the unemployment rate has dropped from 9.4% to start the quarter to the recent announcement that it had fallen to 8.8% in March.  Unemployment is at its lowest point in two years and has dropped a full percentage point since November.  Also, the amount or workers filing for unemployment insurance is falling as initial jobless claims have reached their lowest level since July of 2008.

-The housing market continues to be a weak spot of the economy.  While home sales had been rising until February, home prices have been falling with January being the third straight month of price declines.  Rising interest rates also provide an impediment against improvement in the market as home ownership would become more expensive.

-Other sectors of the economy continue to show improvement.  The first quarter saw global manufacturing activity maintain its strong growth, auto sales rise, and retail sales continue to grow.  However, consumer confidence fell in March after increasing earlier in the quarter over rising gas prices along with the issues in the Middle East and Japan.  Over the course of 2010 U.S. families reduced their debt burden to their lowest point in 6 years, they are now in a position to spend more.

-Inflation fears have begun to manifest themselves in economic readings.  Rising food and energy costs have sent the CPI up to 2.1%, however, excluding those items prices are still tame. U.S import prices continue to rise as well, up 6.9% from a year ago. World food prices rose in February to a new high and rising fuel costs are likely to drive prices higher.  China’s inflation rate has continued to rise despite their attempts to control it through increased interest rates.  The ECB has stated that Eurozone rates could be raised in April for the first time since 2008 to combat rising prices as Euro-zone inflation surprised in March and rose well above the ECB’s target.

Corporate News

-Corporations’ profits rose 29% in 2010, the fastest pace of growth in six decades.  Expectations for continued robust growth in the first quarter of 2011 have diminished given rising oil and commodity prices.  The disasters in Japan are expected to have little impact on US companies’ profits in the first quarter given the events’ timing late in the quarter, but the effects are expected to grow in the 2nd quarter.

-The quarter saw several noteworthy mergers.  In February, AOL agreed to purchase online newspaper Huffington Post, Deutsche Borse AG agreed to a deal to take over the New York Stock Exchange, which would create the world’s largest financial exchange, and pharmaceutical giant Sanofi-Aventis purchased biotech company Genzyme.  In March AT&T announced it was purchasing revival wireless provider T-Mobile in a $39 billion dollar deal, which would make AT&T the largest US wireless carrier.  The merger would be the largest so far this year, but faces significant regulatory barriers

-Talks between the NFL and the Players Association have fallen apart.  The union was disbanded and players sued the 32 team owners in federal court while the owners have locked out the players.

-Berkshire Hathaway is in some hot water as potential successor to Warren Buffet, David Sokol, announced he was leaving the firm after disclosing a questionable stock purchase he had made of Lubrizol, a company Berkshire recently purchased. 

Regulatory News

-The fight between Democrats and Republicans in Wisconsin over unionized labor and their collective barraging rights and benefits ended with Republicans maneuvering around Democrats stall tactics and passing the bill.  However, a judge has blocked the implementation of the law to review an appeal.

-Tax revenue at the state level has nearly climbed back to the peak it reached in 2007 due to the upturn in the economy and tax increases.  Despite the resurgence there are still lingering problems on how to cover rising government costs, which have risen faster than inflation.  However at the local level, which primarily earns its revenue through property taxes, income has fallen due to the sagging housing market, making budgeting a tougher task.

Market News

-Stock markets continued their march upwards over the first quarter of 2011, despite several global shocks, with US stocks seeing their best first quarter in 12 years.  Beginning in January with the uprisings in Egypt and other Middle Eastern and North African countries, followed by the unrest that turned to civil war in Libya sending oil prices skyward, and most recently the earthquake, tsunami, and nuclear crisis in Japan, the market has seen its share of jolting news.  However, after each event the market has been able to rebound quickly giving investors’ confidence.  The Dow and S&P 500, after rising 7% through mid February, then fell and gave up almost all of their gains after the developments in Libya and Japan.  However, stocks recovered just as quickly gaining 6% over the last 2 weeks of March as investors gained confidence from the G-7 nations intervening in the currency markets for the first time since 2000 to help slow the rise of the Yen.  The Dow and S&P 500 registered gains of 0.91% and 0.04% for the month and 7.07% and 5.92% for the first quarter, respectively.  Growth vs. value performance was mixed over the quarter with growth beating value in small and mid-cap, but value beating growth in large cap.  Small cap stocks were the star of the quarter as they were the best performer of any asset class.  International developed markets fell in March on the disasters in Japan and on news that Portugal likely will be the latest European country to require a bailout.  Emerging markets rebounded after a poor first two months of the year.  Developed markets were up 3.4% for the quarter, while emerging markets rose 2.1%.

-With the protracted situation in Libya, oil prices continued to climb in March.  After starting the year off at $90 a barrel the many uprisings and turmoil in the North African and Middle Eastern regions has sent oil over $107 a barrel to end March. The US Dept. of Energy expects the price of oil will hover around $105 a barrel in 2011.  Investors are viewing the rise in oil with a cautious eye as continued increases in the price of oil could have a crippling affect on the continued economic recovery. 

-Bonds saw mostly flat to slightly down performance in March with slightly better performance for the first quarter.  Investors continued to grow more confident in the economic recovery over the quarter and they looked to move out of fixed income and into more risky assets. Treasuries ended March on their longest losing streak in 21 years.  This also has shown itself with investors increasing interest in subprime mortgages, the same investments that brought about the credit crisis, as investors hunt for yield.    The strongest performers for the quarter were Corporates and Munis up between 0.5% and 1.2% with longer maturities having stronger performance. Treasuries and global bonds were down for the quarter.  The 10 year treasury yield bounced around over the first quarter with the various market shocks, but ended March up for the quarter to 3.47%. 

Index Performance                                               March         1st Quarter

US Large Cap Stock (S&P 500)                                 +0.04%              +5.92%
International Stock (FTSE AW ex US)                     +0.01%              +3.54%
US Broad Bonds (BarCap Aggregate)                       +0.06%             +0.42%
US Government Bond (Barclay’s Govt)                   -0.03%               -0.08%
Cash (ML 3Month T-Bill)                                         +0.03%             +0.05%

 

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