It was not a smooth path, but the stock market continued its upward movement in the 1st quarter of 2011.
1st Quarter Analysis and our Strategy:
Markets overcame a pair of major shocks in the first quarter.The 2010–2011 Middle East and North Africa protests, also known as the Arab Spring, are a revolutionary wave of demonstrations and protests which have been taking place in the Middle East and North Africa since 18 December 2010. To date, there have been revolutions in Tunisia and Egypt with the ouster of President Mubarak in Egypt.There is currently a civil war in Libya and there have been major protests in Algeria, Bahrain, Iran, Djibouti, Iraq, Jordan, Syria, Oman and Yemen. The protests have shared techniques of civil resistance in sustained campaigns involving strikes, demonstrations, marches and rallies. The U.S. involvement in the Libyan crisis is still not resolved and the outcome of this conflict is yet to be determined.
The second crisis is the devastating earthquake and nuclear problems in Japan which sent investors scrambling to reassess their hopeful outlooks for the second time in a span of a month.Markets seemed to take the Egyptian problem in stride with markets hitting 2 ˝ year highs in late February.Oil prices surged to two year highs, however, after worries over Libyan violence resulted in oil topping $100 bbl.Stock markets plunged 6% after the Japanese problem on March 11th with investors worried that the global economy would suffer and slow down as Japan tried to sort its way out of the mess.However, stocks recovered rather quickly and in the end produced the best first quarter returns since 1998.
Investors continued to take on risk, and the smaller stocks, highlighted by the Russell 2000 Index, were the best performers among the broad U.S. benchmarks.All sectors did reasonably well with energy stocks performing the best as oil closed at $106 bbl at the end of the quarter.
The rally from the lows of March 2009 remains impressive.Dark clouds nevertheless remain.The European debt crisis remains.Crude oil is up over $100 bbl. with no end to the problems in the Middle East.The U.S. housing market is showing significant, renewed weakness.Many are worried about the continued long-term debt problems facing our country.
From a positive standpoint, the job recovery gained speed in March.There was a net 216,000 new jobs created this past month with unemployment easing down to 8.8%.A half a million Americans have found work since the beginning of the year which is good news.However, this jobs recovery remains one of the weakest on record.The economy is still seven million jobs shy of pre-recession employment.
Wages are flat which is not unusual in the early stages of a recovery, but the problem is that prices are rising.Consumer prices went up 0.4% in January and 0.5% in February.The recent increases in gasoline prices almost assure that there will be a further rise in March as well.These increases are putting the squeeze on consumers which may inhibit their ability to spend elsewhere thus cutting off the recovery.
This is unfortunately to be expected in a recovery that is fueled primarily by easy monetary policy.The Federal Reserve has kept interest rates at near-zero for close to 2 ˝ years.This action is accompanied by unprecedented asset purchases to keep bond rates low.This has helped lift the economy but at the cost of higher prices which are now eating into American incomes.
Perhaps the biggest uncertainty surrounds this U.S. monetary policy.The Fed’s second round of quantitative easing where the Fed is buying U.S. bonds is scheduled to end in June.It is unclear what the Federal Reserve will do next but the odds are that it will end QE2.The steady role of cheap money has played a large part in the rally in stocks and the increase in commodity prices.An end to this policy could halt the gains in the stock market.
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