The stock market extended its rally during the first quarter of 2010. After a steep decline in February due to global economic and political uncertainty stock prices rebounded nicely.
1st Quarter: More Up or Down?
After such a great comeback in 2009, nobody expected the market to continue its straight up improvement in 2010. This happened to be the case in the first several weeks of the year, however, as new money moved into the market and investors who had been left on the sidelines started to move some of their reserves in. This rise came to an abrupt halt in February, however, when Greece revealed that it was in danger of defaulting on its national debt. This news sent the markets into a tailspin and all gains were lost with the market turning negative by the end of February.
This trend was in turn reversed by the end of the quarter when Germany and France arranged a rescue plan to bail out Greece and possible other Euro zone nations in the future. This plan also involves the International Monetary Fund and amounts to about 22 billion euros. With this fear on hold, the market moved back up with stocks up about 3.5% for the quarter and bonds up about 1.5%.
What Was Our Strategy for the 1st Quarter?
As indicated in our last quarterly report, the strategy that we have employed over the past year was to be cautious but invest when the worst appeared to be over. We moved dollars back into the markets in the spring and mid-2009 and were able to take advantage of the tremendous gains for the past year.
We have not changed our allocation or strategy for most portfolios during this current year. We continue to have the majority of assets invested in large-cap funds with more in the growth area than value. These have done well so far this year. We have some assets in the bond sector which also went up the past three months. The areas that have lagged so far are the energy and some of the commodity sectors such as gold. Health care has not done as well until recently when some of the uncertainty over the health care legislation was removed. We expect these sectors to come back strongly assuming the economy continues to grow. Given where we have come from we are comfortable with the composition of the portfolio and the gains we have made so far in 2010.
Looking Ahead to Summer 2010
As we move into the 2nd quarter, markets are facing their biggest hurdle so far this year: the Federal Reserveís moving closer to ending its unprecedented easing relative to the economy. For the time being investors seem to believe that the Fed has things under control. If things donít go as smoothly, however, the stocks could be in for a bit of a drop.
A concern has emerged over the prospect of rising interest rates in the emerging markets and commodity producing countries. India recently raised interest rates and Brazil is likely to do the same soon. Focus is on China, however, where demand for raw materials is seen as driving commodity prices which in turn affect energy and materials stocks. It is assumed that China will take a slow approach to adjusting interest rates. If things donít go well, however, and China overreacts to conditions, markets might react negatively.
On a more upbeat note, as more positive economic data rolls in, the sustain ability argument will be put to bed. In other words, talk of the double-dip recession will be over. Given the strength of corporate balance sheets the underpinning for a reasonable market the rest of the year is not unrealistic. In addition, corporations have all-time highs in undistributed corporate profits. These are the dollars that have been made but not distributed or spent. These dollars could be put to work in the form of acquisition. This would be a further boost to markets.
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