Near the end of the First Quarter, Japan was devastated by a Tsunami, a nuclear threat, and a series of earthquakes. Based on the number of phone calls we received from plan participants, it is evident that people are nervous about how this will affect the economy and the Market. Amazingly, other then the production of automobiles and Apple computers, we are escaping with very little damage to our Markets. Each quarter we write a Market Commentary to summarize the events of that quarter, why things occurred and then ultimately where we see the Market and economy heading. Similar to the past few years, during the First Quarter of this year many significant events occurred which could not only shape 2011 but beyond.
While the events in Japan have had a strong psychological effect, the impact to the domestic markets so far has been minimal. What we have experienced domestically can best be described as a "Tug-of-War". There have been good tugs but also times when the rope came loose. First, we will begin with the good. It is clear that the Market and the economy continue in the recovery mode. Unemployment opened the year at 9.4%, increased to 9.5% by the end of January, and then declined to 8.8% as of the end of March. Unfortunately, there is still a long way to go and the employment figures are moving slower than originally predicted, but it is nudging in the right direction. In addition to the improvement in unemployment, corporate earnings have been surging. They expanded by 10-12% in the First Quarter and remain healthy and strong. These numbers show that even though we have a higher unemployment rate, businesses are doing more with less. The cherry on top of the First Quarter is the banks. It seemed that for the majority of the last three years, banks had very little lending activity. We view their attitude now as "Let's Make a Deal". This activity is one of the biggest reasons for the Market to continue its surge. For the First Quarter, the S&P 500 Index was up 5.92% and the trailing 1-year return as of 3/31/11 was 15.65% (BTN Research). It is the third straight quarter of striking market ascent. Over the last three quarters, the Dow has advanced 26.05%, the S&P 500 28.63%, and the NASDAQ 31.85% (BTN Research).
Unfortunately, not all of the news about the markets and the economy is good. We must discuss the negative tugs. We believe each month that we have seen the worst of the housing market but then the bottom keeps dropping. In the First Quarter, housing prices fell by 5%, which is the lowest they have been since 2002. We also have a grey cloud above us called inflation. Over long periods, inflation can wipe out a portion of a person’s real wealth, as a dollar is really not a dollar anymore. That is why long- term investing should be judged on its ability to generate returns to offset and overcome inflation. The biggest negative tug, and the one sector at this time that is getting a lot of focus, is the rapidly rising oil prices. While most believe the rise will not be permanent, there lies a fear factor that if the price for a barrel of oil hits $150, we could be headed for another recession.
Although we have our good and bad domestic “tugs”, we also have international factors that we refer to as wild cards. The last few months we have all watched political revolution in North Africa and the Middle East. In March and into April we then watched the devastation of tragedies that hit Japan.
Finally, we still cannot forget the ongoing saga with the Euro Zone Debt Crisis. With these wild cards, we cannot predict what the results will be. If we look at the past months, our Market has shown the “Teflon” coating it has; however, it doesn’t mean that it can always continue.
So, what lies ahead? Analysts see optimism remaining high with most predicting positive results for the remainder of the year. While the rapidly rising oil prices cause concern, most believe tensions in the Middle East will not worsen and that oil prices will stabilize. While we have said it before, the belief is that the housing market has hit bottom and will also stabilize. With the banks back in the “banking business”, it is a buyer’s market and movement will occur with the heavily saturated real estate market.
The overall market expectation is that we will continue balancing the good and the bad, which is typical in a market recovery. As we have discussed for some time, market recoveries cannot be measured in months or quarters, but in years. While the wounds of 2008 still feel fresh and deep, we have had great market results in 2009, 2010, and are off to a good start in 2011.
With the start of a new year, if you have not reviewed your account and investments in some time, you owe it to yourself to do it sooner than later. While the market has not come all the way back, the vantage point of most participants accounts is such that if you are going to change your account, now is the time to do so.
If there is anything that we can do to help you achieve your retirement or investment goals, please do not hesitate to contact us. We appreciate your continued support of and participation in AdviseMe!® and look forward to working with you.