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The good, the bad… but no real ugly

Don’t look now, but the 1Q of 2011 has come and gone.  This came as a bit of a shock for me as I just finished cleaning up from Christmas…

In fact, not only is the quarter over, but it had pretty darn good equity market returns.  Not since 1998 has the market performed this well in the first quarter.  According to Barron’s, the S&P 500 has been up in seven of the past 8 quarters.

While the equity markets continue to move up, we do acknowledge that there are some warning signs in the economic news that coincide with the good news.

The equity markets we track were all winners last week.  The Dow Jones Industrial Average (DJIA) gained 1.28% to finish at 12,377, the S&P 500 Index gained 1.42% to finish at 1,332 and the Nasdaq Composite Index gained 1.70% to finish at 2,790.  The Russell 2000 index, which tracks the performance of small capitalization stocks, gained 2.78% to finish at 847.

For the quarter, according to Barron’s, the DJIA posted a 6.4% return, the S&P 500 was up 5.4%, the NASDAQ gained 4.8% and the Russell gained 7.6%.  We will dive deeper into the quarter’s returns in our next quarterly newsletter, which will be mailed  to clients over the new few weeks.  Please email us if you are not a client and would like to receive a copy.

The Good:

  • The March unemployment report – Payrolls were up 216k and the previous 2 months were revised up.  Unemployment dropped to 8.8%.  Nice.
  • Investors put $29 billion to work in the equity markets over the previous quarter.   Not bad.
  • Merger and acquisition activity remain robust.
  • Cyclical sectors of the S&P 500 continue to do well.
  • Average Hourly Earnings slowed to just +1.7% in Mar, reducing the odds that higher commodity prices will lead to a sustained acceleration in inflation.  We’ve said forever that we feel that we cannot have core inflation increase without wage increases.  We are sticking to that.

The Bad:

  • Possible government shutdown – we think this gets worked out and there are some signs that negotiations are taking place.  Still, it’s a possibility and will cause problems if it actually happens…obviously.
  • Slowdown in housing – this is a big part of the economy and it needs to be doing better, not worse.
  • Oil prices – big, important variable.  Middle East is the obvious wild card.  No earth shattering analysis there.
  • End of QE2 – Lots of speculation that this will cause a disruption in the equity markets.  Problem – The S&P declined -16% over 4 months from its Apr peak of 1217 after QE1 expired. Unemployment claims 4 week average rose +22k from their July 2010 low of 455k.  We suspect Bernanke knows these statistics.

So with that, we wanted to say that our outlook on the equity markets has not changed and we have not taken any steps to change portfolios.  This is due to the fact that we believe in making adjustments only when we see major changes in the business or economic cycles.  While tragic and sad, most of the issues causing the recent selloff are not really impacting those cycles enough to warrant any change.

Call us for help or if you have any questions.

Securities and Financial Planning offered through LPL Financial, a Registered Investment Advisor.  Member FINRA/SIPC

**Standard Compliance Disclosures
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.  All performance referenced is historical and is no guarantee of future results.  All indices are unmanaged and cannot be invested into directly.  Stock investing involves risk including loss of principal.  The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries, and widely held by individuals and institutional investors. The Standard & Poor’s 500 Stock Index (S&P 500) is an unmanaged capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The NASDAQ Composite Index measures all domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index. The Russell 2000 Small Stock Index is an unmanaged index generally representative of the 2000 smallest companies in the Russell 3000 Index.  The Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values.

David B. photo

David B. Armstrong, CFA

President & Co-Founder

Dave got into the industry when he discovered his passion for finance in his mid-20’s. He’s a combat veteran and served as an officer in the United States Marines Corps on both active duty and in the reserves, retiring at the rank of Lieutenant Colonel. While serving on active duty, Dave was unable to spend money on deployments, so he became a self-taught investor. Along with a few bucks cash as a bouncer, his investing performance grew to be good....

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