The first quarter of 2012 was a good beginning to the year. We had solid gains in the economy, which were reflected in a strong upward movement in stock prices. In part, these advances were due to good earnings growth during the Christmas season. The market was also strengthened by forecasts for continued earnings gains for the companies in the S&P 500, not only in 2012, but also for 2013. These increases in forecasts helped to paint a brighter picture for the future of our economy. Turning to the fixed income market, interest rates were steady for most of the quarter, but moved higher at the end of March, resulting in a slight negative total return in the 10-Year Treasury (see back page). Bond results were essentially flat, with the Barclay’s Government/Credit Intermediate Bond Index up .61%. Despite (indeed, perhaps because of) the flat returns in the bond market, we are still confident in equities. In this letter, I will show you why we remain optimistic for both the economy and the financial markets.
The expansion of the economy, despite being slow and uneven, has been one of the better-kept secrets in the U.S. over the last six months. This was confirmed by the recent upward revision of the Real Gross Domestic Product for the fourth quarter to an annualized rate of +3%, a level consistent with our country’s longer-term results. The skeptical stock market of last summer and fall responded to the good news, advancing 12.66% in the first quarter as measured by the S&P 500 index, the best first-quarter advance since 1998. The financial sector, one of last year’s worst-performing sectors, reversed roles and was one of the best in the first quarter of 2012. (more…)
When I was a young boy of ten or eleven, the smartest guy in my class enticed me to take a roller coaster ride with him on class day at Baltimore’s old Gwynn Oak park. Mistakenly thinking he was an experienced rider, we jumped into the last car, which my friend assured me was the safest. Only later did I realize he had never ridden a roller coaster and the last car experiences the most violent movements. We both stepped out of the car terrified by the experience. For me, it was to be my first and last ride on a roller coaster. As I look back at 2011, financially, this was much like that roller coaster ride of 50 years ago. The global financial markets rocked and swerved all over the place, only to finish near where they started. The experience was not as frightening as that real ride, but the markets in 2011 were nonetheless unpleasant.
After the very sharp stock market decline in the third quarter, the equity markets gave us a holiday present, advancing 12% in the fourth quarter, bringing the full year total return to the S&P 500 to 2%. However, 2011’s results were punctuated by over 100 trading days where the Dow Jones Industrial Average closed up or down more than 100 points and experienced 16 days where the Dow advanced or declined by over 200 points. This comes in the context of 252 trading days in a year. These levels of volatility are beat out recently only by those seen in the recession years of 2008 and 2002. (more…)
Put simply, it was a terrible summer for both the U.S. and European markets. The economic recovery that began in 2009 stalled, and the anticipated improvement in employment failed to materialize. Continued structural weakness in housing further retarded the overall recovery. Many other industries reported mixed results with one strong month followed by weakness in the next, resulting in a trendless quarter. Estimates for gross domestic product growth in the third quarter were halved from 3.6% at the start of the quarter to 1.8% at quarter-end.
In addition, a political fight over extending the debt ceiling frightened American consumers, slowing purchasing and threatening the economy with a double-dip recession. Though the debt extension was resolved at the 11th hour, it was not without cost. Standard and Poor’s, an established independent bond rating agency, downgraded the creditworthiness of the U.S. government debt from AAA to AA+. While not of major financial significance to the U.S., it was embarrassing. However, these events did have broad-based negative effects, not only on the U.S. equity markets, which declined 13.9% in the quarter, but also on foreign bonds and equities. (more…)
The economic recovery that began in Q1 2009 slowed unexpectedly in the first half of 2011. Reported growth of the GDP in Q1 2011 was only at an annualized rate of 1.9%, and a similar modest increase is anticipated for the second quarter. At the beginning of the year, a Bloomberg survey had consensus number for the quarter at 2.5%.
The shortfall caught the stock markets by surprise, and after reaching a high of 12,810 on April 29, the Dow Jones Industrial Index fell 3.1% to 12,414 to end the quarter. For the quarter, the Dow was up 1.4%, and up 8.6% for the first half. The S&P 500 was also up a hair, 0.22% for the quarter. Although there was a lot of volatility this quarter, stocks ended up where they started.
On the other hand, interest rates, sensing an economic slowdown, fell to new lows for this cycle. The 10 year U.S. Treasury note closed at a low of 2.86% on June 24th. Returns of short term Treasury notes (U.S. government securities with maturities less than a year) were even more startling. (more…)
The first quarter of 2011 was dominated by a series of events that eclipsed the financial markets as front-page news. An unexpected breakdown in the political order in North Africa spread throughout the Mideast, and several governments important to Western economic interests tottered on the brink of collapse by quarter’s end. Governments in Tunisia and Egypt fell and significant unrest spread to Bahrain, a small but important financial center responsible for the coordination of Middle Eastern oil settlements. We were surprised that by quarter’s end a Western coalition had begun offensive air operations against the repressive government of Libya and, under the supervision of NATO, the West was attempting to bring down the government of Muammar Gaddafi, the long-running leader of Libya.
The European banking system came under pressure as banks in Portugal, Greece, Italy, and Spain joined those of Iceland and Ireland in experiencing varying degrees of loss of confidence by depositors and members of the European Union. France and Germany, the wealthy nations in the E.U., although willing to aid the affected nations, offered bailout terms that were quite steep. At quarter’s end, the E.U. banking situation remained unresolved. (more…)
The economy and the financial markets performed well in the fourth quarter and for the full year 2010. The Standard and Poor’s 500 index increased 10.49% in the quarter and 14.79% for the full year, somewhat above the long-run average return for common stocks since records were established in 1926. Bonds also delivered positive returns, and the 10-year and 30-year treasuries provided returns of 7.9% and 8.7%, respectively.
But in the fourth quarter of 2010, there was a significant divergence in the performance of stocks vs. bonds. The sharp fourth-quarter advance in stocks (10.49%) was not matched by treasury returns. In the final quarter of 2010, the ten-year treasury fell 5.6% and the thirty-year treasury declined 9.8%. The bond market appears to be reacting to a sharp rise in the projected fiscal 2011 federal deficit of $1.27 trillion ($1,270 billion), up from $480 billion in fiscal 2009. Calls for spending cuts, repeal of the health care program, and a contentious debate over increasing the government debt ceiling may have temporarily spooked the bond market. (more…)
The third quarter of 2010 was a remarkable one for stocks and bonds. As is rarely the case, both performed exceptionally well. We do not anticipate this unusual trend will continue much longer. It is, however, very nice to have both major components of our clients’ portfolios performing so well at the same time.
A major reason for the strong quarter in stocks was the shift in the consensus view of the economy. In the beginning of the quarter, most pundits (not us, I might add) were calling for a “double-dip” recession. This was a step backwards for the market. By the end of August, that view began to shift towards our belief that the economy would avoid another recession. Clearly, two steps forward. Sentiment shifted because the economic data overall began to turn slightly more positive. With this shift in sentiment, the market rallied. By the end of the quarter, the Dow Jones Industrial Average was almost back to 11,000. (more…)
The second quarter was punctuated by two major crises: the European financial crisis and the BP oil disaster. Both dramatically affected the market and both arguably had very little impact on our economy. When we look beyond these two headline-grabbing events, we see a continuation of the economic recovery. This market downturn should prove to be a buying opportunity. (more…)
The U.S. economy has continued the recovery that began late in 2009. We expect first quarter 2010 growth to be around 3.5%. The recovery is currently being stimulated by improvements in manufacturing, specifically automobiles, as well as a general rebuilding of inventories throughout the economy. Inventories declined as much as 15% at the trough of the recession. First quarter economic results will be adversely affected by the awful weather conditions that affected the entire northern half of the United States, but we believe the next step in the recovery will be in the housing sector and should occur this spring.
Representing about 10% of the economy, housing is influenced by seasonal economic adjustments that, by reason of the weather, sent confusing signals. Existing home sales are at an annual rate of 5,020,000 units, up from a low of 4,610,000 in the second quarter of 2009. Though still below optimal levels, we remain optimistic, as low mortgage rates (about 5% for a 30-year fixed rate) should continue to stimulate housing demand. In addition, the home buyer’s tax credit, which expires in April, continues to help. Hopefully, the second quarter, which is typically a much stronger quarter for housing, will lead to a growing consensus that the recovery is gaining momentum. (more…)
The 4th quarter was another good one for the stock market, marking its third consecutive advance. As a leading indicator for the economy, the market is signaling investors the recovery is real. Where there are still plenty of skeptics, it would appear to us the improving economic data is forming a base upon which a meaningful, sustainable economic recovery can occur.
For the quarter, the S&P 500 returned 6.01%. You may recall the 2nd and 3rd quarters returned 15.94% and 15.56%, respectively. From the index’s trough on March 9, 2009, the S&P 500 has returned 67.8%, one of the strongest nine-month periods in the history of the index. The Dow Jones Industrial Average returned 59.8% over the same time period. For the full year 2009, the S&P 500, Dow and Nasdaq returned 26.50%, 22.60% and 43.91%, respectively. After an abysmal 2008, these results were well-received.
As the stock market began its recovery, the bond market moved in the opposite direction. In the first half of 2009, we saw interest rates move to historic lows as the government continued to work to grease the skids of the credit markets. As these programs began to have a positive effect, interest rates began moving higher. By the end of the year, those rates were much higher. The 10-year Treasury started 2009 yielding 2.20% and ended it yielding 3.79%. As you will recall, when yields rise, bond prices fall. Most Treasuries provided investors with a negative return for the year. Because of the perceived risks in Corporate and Municipal bonds during the year, their yields did not drop as much. The result for investors was that bonds produced positive returns for the year. The Barclays Corporate Index returned 5.24% for the year and the Barclay’s Municipal Index returned 7.61%. (more…)
The domestic economy most likely turned up in the third quarter of 2009, abating fears of a major economic depression. Seven of the ten leading indicators are now positively contributing to the Index of Leading Economic Indicators. The economic dislocations of 2007 and 2008 are receding. One of the leading indicators, the S&P 500 Index, delivered another very strong quarter, making it two consecutive double-digit percentage increases. The S&P rose 15.6%, the Dow was up 15.7% and the NASDAQ jumped 15.7%. Last quarter, these indexes increased 15.9%, 11.9% and 20.0%, respectively. These results are the best quarterly returns in a decade. Even after this tremendous run, the S&P 500 is still almost 15% below the level experienced when Lehman Brothers declared bankruptcy on September 15, 2008. (more…)
After reading William Cohan’s book “House of Cards,” I was taken aback by the level of greed that has tarnished respected financial institutions. Greed turned them into financial casinos where executive compensation levels became an overriding corporate objective. This excess is wrong and, just as the excesses of Drexel Burnham in the late 1980’s were corrected, today’s unwarranted and unnecessary compensation levels will eventually return to some form of sanity and normalcy.
Greed was not restricted to the corporate suites of managements across the country. Unfortunately, more financial thievery was exposed this quarter as the public confidence in the U. S. financial markets had to withstand another indictment. Just as the Madoff case came to an end with a 150 year sentence, Mr. R. Allen Stanford, a Houston based financier, who operated significant offshore tax havens, was indicted. To our delight, the sheriff is here, and hopefully those that have abused the financial structure of our economy will be awarded a full measure of the prison sentences and fines they deserve. This is a precondition for restoring investor confidence, which should result in more normal equity valuations. “Normalcy” could equate to more than 50% above current stock prices. (See the Schopf Stop for more on this.) (more…)
Is this rally for real? On March 6, the S&P 500 hit a low of 666.8. Since then, the index is up to 797.9, a very impressive recovery in a short period of time. In the closing three weeks of the quarter, we have seen a 16.8% gain in the index. Investors are cautious, however— we have seen promising 10% gains wiped out three times since September. This gut-wrenching market appears to be pricing in a tremendous amount of bad news. Hope that the Obama administration would usher in a more optimistic mood was quickly dashed as the S&P 500 in January and February returned -8.3% and -10.8%, respectively. For the quarter, the S&P was down 10.9%.
To be sure, the recent economic numbers remain gloomy. The Gross Domestic Product fell at an annual rate of 6.3% in the fourth quarter of 2008. A similar decline is likely in the first quarter of 2009. This is the worst back-to-back quarterly performance since the fourth quarter of 1981 and first quarter of 1982. Unemployment spiked to 8.1% and will likely go higher, possibly exceeding 10% in the second half of 2009. The manufacturing and service sectors both continue to contract. All in all, the economy is performing very poorly.
There are, however, early signs of economic stability. The housing market is showing glimmers of hope as new home starts are up and housing affordability is at record highs. Inflation, the enemy of financial assets, is well under control as commodity prices have fallen dramatically from their speculative excesses. Historically low interest rates, combined with government-led programs, have allowed the credit markets to return to some semblance of normalcy. Finally, the strengthening dollar is a very good indication that the economy is beginning to turn. (more…)
It was another difficult quarter for the stock market as measured by the S&P 500. Equity prices declined 21.8%, resulting in the worst quarterly performance since the market crash during the fourth quarter of 1987. For the year, the market declined 37.0%, the second worst year in the history of the stock market and the steepest one-year decline since 1931. Not surprisingly, the economic conditions deteriorated as housing prices continued to fall and foreclosure rates in many markets rose sharply.
Employment levels also declined and the unemployment rate increased to 6.7% in the third quarter, up sharply from 5.0% at the outset of the year. This was still much better than the 8.9% unemployment level seen in the second quarter of 1975, the last serious recession since 1931. By comparison, unemployment levels of the depression years, 1933 – 1937, ranged from 14-25%. (more…)
In the third quarter of 2008, the markets experienced the most serious challenge to world financial stability since the depression of the 1930s. What began in early 2007 with a sharp upturn in subprime mortgage delinquencies spread into commercial banks, insurance companies, and investment banking firms. By quarter’s end, the world’s credit markets were in a state of seizure. Investors and borrowers began to lose confidence in our leading financial institutions and volatility reached extremely high levels. In particular, equity prices fell sharply, reacting to seemingly unbelievable developments in the individual financial institutions.
As the quarter came to a close, some of our nation’s largest institutions had either ceased to exist or were in the process of radically changing their business models. Goldman Sachs and Morgan Stanley experienced 40% declines in stock values, in just three days, victims of short-sellers and hedge funds. By the week ended September 19th, Morgan and Goldman announced plans to reorganize as bank holding companies. In a single six-month period, all five of America’s major investment banking firms (Bear Stearns, Merrill Lynch, Lehman Brothers, Goldman Sachs, and Morgan Stanley) either merged with a bank, reorganized, or filed for bankruptcy. The end of America’s leadership in investment banking would have been unthinkable at the start of the third quarter of 2008.
Commercial banks were also swept into the maelstrom. Wachovia Bank’s stock fell from 60 in early 2007, to as low as 10 on September 26, 2008. As deposits fled, Wachovia was forced into a merger with Citigroup, which was announced on September 29th. This followed the merger of Washington Mutual, our nation’s largest thrift, into J. P. Morgan, which had occurred earlier in the same week. As the leading originator of many of the subprime mortgages, Washington Mutual was taken over by the Office of Thrift Supervision and forced to accept merger terms very favorable to J. P. Morgan. Even the old-line banks such as Fifth Third Bank of Cincinnati, National City and KeyCorp (both Cleveland-based banks), and Regions Financial of Birmingham experienced share price declines of 70% or more, frightening investors and depositors. (more…)
