U.S. stocks staged their strongest start to a year in more than a decade in the first quarter.
Investors were emboldened by signs of an easing to Europe’s debt crisis and a strengthening of the global economy and pushed stocks to their best opening quarter since 1998. U.S. gains came amid a global rally as markets from Tokyoto Frankfurtposted their strongest quarterly gains in several years. Last year investors put their money into defensive stocks such as utilities and healthcare companies. These companies make money in bad times as well as good. This year, however, it is the riskier stocks that have made the large gains.
1st Quarter Results:
Financial stocks which suffered the most in the great recession were up 22%, the best of the 10 industry groups in the S&P 500. Technology companies were up 21% while small company stocks did well also as investors expected a continued economic recovery. Utilities were down 3%, the only group in the red. It was the best January for stocks since 1997 as the Federal Reserve said it would keep benchmark interest rates near zero for almost three years.
On February 28th, the DOW rose above 13,000 for the first time since 2008, four months before the financial crisis hit in September. Two weeks later, in early March, the NASDAQ moved above the 3,000 level for the first time since the dot-com craze a dozen years earlier. The market, unlike last fall, rose steadily without any large up and down moves. The gap between the daily high and low for the S&P averaged about 0.9% so far this year. The variations were three times as much early last fall when the market was obsessed with debt problems in Europe and at home.
Investor attention next turns to corporate earnings announcements which begin on April 10th. Companies in the S&P 500 are making more money than ever, a good feat in a tepid economic recovery.
Those who are bullish on stocks note that the S&P trades at 12.9 times expected earnings for the year which is somewhat cheap compared to its 14.6 ten year average. This “forward” multiple is generally higher than the long-term average during bull markets. If it rose to 16 to 18 this year, stocks would be significantly higher than they are now, even with the same earnings’ forecast.
The bears are scoffing at this saying that first quarter profits are expected to fall 0.1% from last year at this time. That would be the first time in more than two years that earnings have not grown. For the full year, forecasts are for earnings to grow 9%, but those predictions count on a 16% growth in the last three months of the year.
Other skeptics point to the role of central banks around the world in lifting markets by printing money, lending at near zero interest rates and buying bonds and other securities. All of these easy money tactics have artificially propped up equity markets.
The DOW has posted gains for six months in a row and only needs to rise about 7% to top the record high it hit in October 2007. The advance this quarter is the biggest quarterly gain for this index ever! Many stock indexes are now trading at levels that exceed analysts’ forecasts for year-end. Some market watchers note that the unseasonably warm winter this year gave an artificial bump to economic indicators, boosting construction activity and shopping. High gasoline prices could also begin to weigh on stocks. Oil prices soared close to $110 a barrel in February as tensions in the Middle East grew, driving gasoline prices higher. Predictions of $4.15 a gallon by Memorial Day lead some to think that consumer spending will suffer as more money goes to the daily cost of traveling.
We remain positive on the economy, however, and expect that the rest of the year will be a positive one despite the reservations outlined above.
Bruce Kraig, MBA, CFP
April 4, 2012
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