Our Thoughts

Quarter in Review: Strong Out of the Gates

By Jon P. Yankee, MBA, CFP®

The investment markets offer no guarantees; you lay your money on the table and take your chances.  In the first quarter, those who placed their bets that U.S. stocks would enhance their wealth – in addition to those of us who stayed the course with our investment portfolios – were rewarded handsomely.

The S&P 500 index of large U.S. company stocks gained 10.61% for the quarter and celebrated a new closing high on the last trading day of the quarter.  Small company stocks, as measured by the Russell 2000 index, were up 12.39% in the first three months of the year.

When you look at global returns, it becomes clear that U.S. stocks delivered standout performance compared with the rest of the world.  The broad-based EAFE index of larger companies in developed economies rose 4.38% during the first quarter.  In the only truly negative investment news, the EAFE Emerging Markets index of lesser-developed economies fell 1.92% for the quarter.

Looking over the other investment categories, commercial real estate, as measured by the FTSE NAREIT index, posted an 8.10% gain for the quarter.  Commodities, as measured by the Dow Jones/UBS Commodities Index, were just under flat, returning -1.13% for the quarter.

Investors who retreated to the safest bond categories deserve our sympathy, as Treasury bonds continue to post near-record low yields.  Today, if you lend the U.S. government money by purchasing a 2-year Treasury bond, your coupon rate is 0.24% a year; lend them a hundred dollars and you get back less than a quarter every 12 months. 

It is hard to believe that the U.S. and global economies are still suffering a hangover from the Great Recession, but the fact that the Federal Reserve Board is keeping interest rates low, coupled with still-high unemployment, makes the case.  So, too, does unusually slow and bouncy economic growth; the U.S. economy, measured by the Gross Domestic Product, rose at a 0.4% annual rate in last year’s fourth quarter, after a 3.1% gain in the previous three months.

However, there have been some optimistic signs.  Consumer spending, which accounts for roughly 70% of the U.S. economy, rose in February by the highest rate in five months, according to the Commerce Department.  Although the gain was still a modest 0.7%, the fact that people were spending more surprised many economists, who expected that the two percentage point increase in the payroll tax would cause Americans to feel poorer when they received their paychecks. 

Rising home values and wage gains across the economy have made it easier for households to repair their finances.  Incomes were up 1.1% in February and the overall U.S. savings rate managed to climb from 2.2% to 2.6%, despite the increased spending and higher taxes.  Inflation is still low and unemployment is finally trending downward.  Employers added a net 355,000 workers in the first two months of the year.  Rhode Island, Vermont, California and New Jersey showed the biggest declines in unemployment rates.

Does this mean the economic recovery will accelerate, boosting stock prices to ever-higher levels?  Or are today’s record stock prices a sign that the market is about to take a plunge?  Alas, only somebody with a working crystal ball can answer these questions.  What we DO know is that the most successful investors are fearful when everyone around them is greedy, and greedy when other investors are fearful.  For the past year, investors have been extremely nervous about U.S. deficits and the continuing debt crisis in Europe, yet stock market returns were excellent last year and unusually high in the first three months of this year.

All we can say for certain is that eventually the U.S. economy and the global markets will recover their mojo, and the Great Recession of 2008 will become a distant memory.  Historically, the markets have delivered positive returns about 70% of the time, which shows the value of sticking to an investment discipline over multiple market cycles.