1st Quarter Client Note

The S&P 500 Index rose 12.59% during the quarter. This was on top of an 11.82% increase in the 4th quarter of 2011, reaching a four year high in March. After a difficult 2011, international developed markets stocks rose nearly 11% and emerging markets increased by 13.65%. Even Japan, the ultimate financial zombie, marked its best first quarter in 24 years, rising 19%. All this with fear continuing to be the dominant theme for the average investor. Morningstar reported a net outflow of $114 billion from domestic stock funds in the last 12 months.

On the fixed income side, interest rates ticked up, causing long-term government bonds to lose value. The BarCap Aggregate Bond Index rose a modest .30%. Other fixed income categories, including corporate and municipal bonds continued to perform well.

None of this could have been easily forecasted by watching the headlines from last summer (including a possible US debt default and the downgrade of Treasuries) and continuing into the fall (possible Greek default). As they say, stocks often “climb a wall of worry.”

Given the depth of the 2008 recession, the economic recovery is understandably taking – and will continue to take – a very long time. Economic growth in developed economies may hover around the 2% annual mark no matter what governmental policies are implemented. The economy is creating jobs, but not at a fast enough pace to replace all those that have been lost. Not to mention for people who have been entering the work force.


There is no hotter debate than the one around valuations and the price earnings ratio of the market. Acolytes of the PE/10 (developed by Yale Professor Robert Shiller, using a cyclically adjusted 10 year average of earnings for the denominator) see stocks as being overvalued. On the other hand, Wharton Professor Jeremy Siegel sees P/E’s as being low to moderate on a historical basis. In any event, it is exceedingly difficult to time the market based on these kinds of formulas and genius appears only in retrospect.

Political Season

The debate over stimulus vs. tax cuts will probably never be resolved. Government spending and Federal Reserve monetary policy certainly haven’t cured, more than temporarily, the hangover from the recession. The business cycle must naturally run its course. Unemployment, the housing crisis, rising gasoline prices and resolution of excess sovereign debt all need to be dealt with. The November elections are looming and the likely result, regardless of who wins the election, seems to be a compromise of higher taxes and lower spending.

One thing for sure though, it is unrealistic to expect double digit stock returns on a quarterly, or even on an annual basis. Balancing our expectations – along with our portfolios – is the wisest course.

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