Q1 2011 Economic and Market Review
The first quarter of 2011 delivered positive results for investors albeit with significant equity market volatility through the month of March. Notwithstanding far-reaching regional instability in the Middle East and North Africa and a major earthquake and tsunami damaging nuclear plants in Japan, the financial markets continued to move higher, reflecting deepening optimism about the two-year-old recovery from the global financial crisis.
The S&P 500 Index rose 5.92% over the quarter, while the world ex-US, as represented by the MSCI All Country World ex-US Index, returned 3.49%. In the fixed income markets, investing in riskier sectors was rewarded and the strength of the euro was also reflected in returns. The Barclays Capital US Aggregate Index netted 0.42%, while the riskier Barclays Capital US High Yield 2% Capped Index climbed 3.89% and the Barclays Capital Euro Aggregate Index returned 4.92%.
Optimism Dominates
Investors seemed to ignore negative and mixed economic news, preferring to focus on the positive. Residential housing continued to drag and climbing food prices threatened to erode discretionary spending, not only domestically but around the world. Government debt levels remained elevated in many European countries, as well as in the US and Japan. Yet corporate earnings were strong, with companies continuing to hold record-high cash. In the US, employment figures continued to slowly improve and at quarter end news was released that the unemployment rate fell to 8.8% in March, which was a two-year low. All in all, as the financial crisis continued to recede, markets preferred to concentrate virtually all of their attention on the positives.
Potential Game Changers
The world events—the Japanese earthquake and tsunami and political uprisings in the Middle East and North Africa—provided a backdrop for significant volatility in the latter part of the first quarter, but generally speaking, the markets responded by continuing to advance from those setbacks. And yet either could impact the environment for investors as the year continues to unfold.
Events in Libya took the spotlight in an unstable region during March. By quarter end, the price of oil had reached a 30-month high, leading to worries that oil could be the game changer for the economy and the market. Although oil prices could spike if inventories dry up, some analysts believe this would be unlikely to happen unless supply from a major oil producing country, such as Saudi Arabia, is disrupted. In contrast to this view, other observers think that the political transformation taking place in the Middle East and North Africa will very likely lead to persistent increases in the price of oil, if only to compensate for elevated risk in an uncertain market.
It is widely believed by investment professionals that the Japanese disaster will not have a major impact on global markets and that recovery will likely take place quickly. However, if leaks at the damaged nuclear power plants lead to a Chernobyl-sized disaster, the negative economic impact will more likely spread beyond Japan and persist for a longer period of time.
Looking Ahead
Ned Davis Research observes that 'macro factors typically give way to company-specific factors as the bull [market] matures.' But with the unusually impactful macro events following the financial crisis—such as the Japanese disaster and burgeoning unrest in oil-producing countries, as well as continuing sovereign debt problems, particularly in Europe—macro factors may continue to drive markets.
This perspective on the possibility for continuing macro-driven markets is compatible with views of other analysts and market observers who anticipate more modest stock gains and a 'choppier ride' as 2011 continues to unfold. Of course, a return to recession will not be ruled out until the economy has recovered fully from the financial crisis. And, at the other extreme, investors could continue to ignore bad news, as they have preferred to do in the recent past, and markets could continue to forge their way upward.
As always, if you have any questions please don't hesitate to call or email at any time.
Sincerely,
Robert O'Braitis
President
Chief Financial Strategist
Lansdowne / Boca Raton
Private Wealth Management
703-724-9499
Bob@LPWMGROUP.com
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(1)Jonathan Burton, "Investors buckle up for Mr. Market's wild ride," April 1, 2011
(2)Jeannine Aversa, "Unemployment rate falls to 8.8 percent, 2-year low," Associated Press April 1, 2011
(3)"Oil climbs to highest since 2008 on Libya conflict," Associated Press, March 31, 2011
(4)Tom Fahey, Ryan McGrail, Richard Skaggs and Joseph Taylor, "middle east politics & oil: the influences on global interest rates, credit spreads & stock prices," Loomis Sayles, March 18, 2011
(5)Javier Blas, "The politics of oil: Wells of anxiety," Financial Times, March 29, 2011
(6)"Following Japanese disaster, long-term investment outlook remains positive," Natixis Global Associates, March 2011
(7)Ed Clissold, CFA, "What to Expect in the Third Year of a Bull Market," Ned Davis Research, Inc. Chart of the Day, March 10, 2011
(8)Barbara Kollmever, "International stock fund investors' dizzying spin," MarketWatch, April 1, 2011. Also see footnote 1.
The information has been obtained from outside sources and is provided by Robert O'Braitis, Financial Professional, AXA Advisors, LLC. Any opinions expressed in this article will not necessarily be those of AXA Advisors, LLC. AXA Advisors, LLC is not a legal or tax advisor. Robert O'Braitis offers securities and investment advisory services through AXA Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC. Insurance and annuity products are offered through AXA Network, LLC and its subsidiaries, an affiliated insurance general agency. Robert O'Braitis, AXA Advisors and AXA Network do not guarantee or accept liability for its accuracy. Lansdowne Private Wealth Management is not a registered investment advisor and is not owned or operated by AXA Advisors or AXA Network. This information should not be construed as institutional advice. All economic and performance data is historical and not indicative of future results. Diversification strategies do not guarantee a profit or protection against loss in a declining market. AGE 62263 (4/11).
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