First Quarter Review – Strong out of the Gates

April 12, 2013

The investment markets offer no guarantees; you lay your money on the table and take your chances.  In the first quarter, those who placed their bets that U.S. stocks would enhance their wealth–plus, of course, those of us who stayed the course with our investment portfolios–were rewarded handsomely.

When you look at global returns, it becomes clear that U.S. stocks delivered standout performance compared with the rest of the world.  The widely-quoted S&P 500 index of large company stocks gained 10.03% for the quarter and celebrated a new closing high of 1,569.19 on the last trading day of the quarter.    While, the broad-based EAFE index of larger companies in developed economies rose 4.38% in U.S. dollar terms during the first quarter.

Investors who retreated to the safest bond categories deserve our sympathy, especially if they are using the coupons for retirement income.  Treasury bonds continue to post near-record low yields.  Today, if you lend the U.S. government money by purchasing a 2-year Treasury bond, your coupon rate is 0.24% a year; lend them a hundred dollars and you get back less than a quarter every 12 months.  Five-year yields are still below 1% (0.76%), and 10-year (1.85%/year) and 30-year (3.10%) T-bonds are not in danger of enriching their purchasers.

It’s hard to believe that the U.S. and global economies are still suffering a hangover from the Great Recession, but the fact that the Federal Reserve Board is keeping interest rates artificially low, coupled with still-high unemployment, makes the case.  So, too, does unusually slow economic growth; the U.S. economy, measured by the Gross Domestic Product, rose at a 0.4% annual rate in last year’s fourth quarter, after a 3.1% gain in the previous three months.

However, there have been some optimistic signs.  Home values and wage gains across the economy have made it easier for households to repair their finances.  Consumer spending, which accounts for roughly 70% of the U.S. economy, rose in February by the highest rate in five months, according to the Commerce Department.  Although the gain was still a modest, the fact that people were spending more surprised many economists, who expected that the two percentage point increase in the payroll tax would cause Americans to spend less when they received their paychecks.

Does this mean the economic recovery will accelerate, boosting stock prices to ever-higher levels?  Or are today’s record stock prices a sign that the market is about to take a plunge?  Only somebody with a working crystal ball can answer these questions.

All we can say for certain is that eventually the U.S. economy and the global markets will come out from the overhanging cloud of 2008, and the Great Recession will become a distant memory.  Historically, the markets have delivered positive returns about 70% of the time, which is something positive to hope for.

Article written by Bob Veres of Inside Information

Sources:

S&P index data: http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf–p-us-l–

International indices: http://www.mscibarra.com/products/indices/international_equity_indices/performance.html

Treasury market rates: http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/

Economic data: http://www.bloomberg.com/news/2013-03-29/consumer-spending-in-u-s-increases-by-most-in-five-months.html

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