First Quarter Commentary
Spring is in the air, the sun is shining and stocks keep rising…let’s hope it continues!!!
The S&P 500 Index capped its best first quarter since 1998, with its fifth straight weekly gain. The DJIA was up 4.1% and the S&P 500 4.9% for the first three months of 2010.
Since March’s low last year, the widely followed S&P 500 Index has generated a total return of 77 percent. Over that same period of time, risk aversion has gone unrewarded, with short-term U.S. Treasuries returning a paltry 1.4 percent, while total return on long-term U.S. Treasuries has been -11.6 percent.
Why is all this money flowing into stocks? According to Monty Guild, CEO of Guild Investment Management (1), there are probably four main factors driving money into equities:
- To obtain a stronger currency.
- To obtain rising dividends.
- To buy stocks of the companies positioned to grow due to improving growth in their home country.
- To avoid the risk of holding bonds while interest rates are rising around the world.
Our conviction to the stock market hasn’t wavered and I have been pleased with the results. In hindsight, the decisions we made on our client’s behalf were good ones. Looking ahead, I am still optimistic that the stock market will be higher at the end of the year than where it is now. Some bad news bears feel that the leadership and polices of our country will impair us, while the bulls feel that the stock market is marching to its own beat, a viewpoint that I have accepted.
The recession has ended and the economy is growing, ever so slightly, but growing just the same. The economy can’t grow until consumers feel better about their financial health. If job security isn’t in the picture, then consumers won’t spend and the economy will suffer. So it’s all about jobs and we are starting to see a reversal in the number of jobs being lost. For the month of March we actually added 162,000 jobs. Finally Corporate America is earning profits because of top line growth, growing revenue rather than cutting expenses. When you put these factors together, it spells out good news for stock investors.
The challenge for conservative investors is in the fixed income arena. As we all know, interest rates are near zero which means that interest on CD’s and bonds are in the same vicinity. Yields on 10-year Treasuries rose to 3.94 percent, their highest level in 10 months, but who wants to lock up their money for 10 years to earn less than 4%? When interest rates rise, the value of those bonds will fall so anyone who buys long term bonds today will be stuck with them unless they want to take a loss.
Interest rates will rise when inflation shows up, but with unemployment hovering near 10%, it may be some time before the Fed has any intentions of raising the Feds Fund Rate. I have been adding some holdings that should act as a hedge from inflation for when this happens. During times like these, stocks actually look more attractive than bonds.
Source (1): Guild Investment Global Market Commentary, March 31, 2010