4/1/2010 - 1st Quarter 2010 - What a difference a year makes.

At the end of the first quarter 2009, though markets had started to rebound, the domestic stock market was off almost 12% through 3/31/09.  This year, although the economy is still in a fragile recovery phase, all major indices finished positive for the first quarter 2010, led by US equities.     

US Equity Markets

After a quick January ascent the markets swooned the second half of January and ended the first month of the year in the red with most indices displaying modest losses. The market’s mood dimmed when the President’s political pestering initially aimed at the health care industry, shifted to Wall Street Banks complete with congressional hearings, on the now     year ago financial crisis.  Additional concerns related to the President’s bloated budget deficit did not help matters.

However, US equity markets rallied in February and March, with March locking in the best gains since November 2009.

In US Business, the Burlington Northern shareholders agreed to be purchased in a tax free exchange by receiving newly issued and split shares of Warren Buffett’s Berkshire Hathaway class B, the latter also are added to the S&P 500. Apple also unveiled a new product aptly named the “I Pad” to a resounding market reception.

Domestic blue-chip stocks, as indicated by the S&P 500 finished the first quarter up just over 4%, while small and midcap domestic stocks were up almost 8%. 
 
International Update

The annual world business titan pilgrimage to Davos Switzerland seemed bigger than ever and contained a striking contrast to 2009’s subdued meetings with most attendees modestly upbeat.  In world business headlines, Global mergers and consolidation continued to evolve with most notably Cadbury PLC agreeing to be acquired in cash by US Kraft Foods.  In other news, a massive recall of a defective gas pedal in auto giant Toyota weighed on it’s company bottom line, share price and most importantly consumer’s perception.  Consequently, US auto makers seized on perceived weakness and grabbed market share. 

From a stock market perspective, international equities had the worst showing of all major indices in the first quarter and were up less than ¼ of 1%, basically a break-even, with emerging markets up about 2%. 

Fixed Income Markets

The Barclays US Aggregate Bond Index finished the first quarter of 2010 up 1.78%, while municipals had a first quarter return of 1.25% and inflation protected securities (“TIP’s”) were up marginally at 0.56%.  Fixed income investors face a tough challenge right now.  Everyone knows interest rates are going up, they can’t go down from basically zero on the short end.  The problem is nobody knows when.  If you are sitting with cash intended for fixed income, do you invest now and risk rates rising suddenly (and face the devaluation of what you just purchased) or do you wait until rates indeed start to rise (in which case you have no return on that money waiting for interest rate increases that may be a year away or more).  As always, we believe a balanced approach is best, spreading money out across the yield curve and in the different asset classes: investment grade corporate, US Gov’t & Agency, floating rate, high yield, foreign and short-term bonds.

Key Rates

The Federal Reserve kept its near zero interest rate policy in check at its first meeting in January. The Federal  Open Market Committee reiterated that an extraordinary low fed funds rate was warranted for an ‘extended period of time’ However, one member of the open Market Committee dissented and pressed for future rate increases based upon perceived economic stability.

Then the  Federal Reserve suddenly raised its discount rate (the rate it charges banks) a quarter-point to .75% on February 18th. The Federal Reserve Chairman emphatically restated that this was not a sign of imminent monetary policy tightening, but rather the winding down of quantitative easing associated with the cessation of the 1.25 trillion agency mortgage back securities purchasing program.

Most economists are forecasting an increase in the Federal funds rate in the second half of 2010.  Cash has basically become a non-earning asset, with Fidelity Cash Reserves now at an effective yield of .10 % as compared to the December 31, 2008 effective yield of 1.89%.

Commodity Update

Oil has continued its path upward.  It began the year at $79.62 per barrel and finished the quarter up 4.9% to $83.54 per barrel.  Gold had a more modest increase of 1.4% for the quarter and finished at $1,113 an ounce.  Commodities have been moving up as the world economy shows some signs of modest growth, albeit off of pretty low comparisons from last year.   

Looking Forward

We believe the zero returns from cash and modest yields from investment grade fixed income will continue to make the stock market one of the more attractive places for new capital, particularly in the dividend paying universe of large cap stocks.  It is not uncommon for a dividend portfolio right now to have a yield north of 3%, fairly attractive when a 5-7 year portfolio of investment grade corporate bonds is yielding in the 3.5% range, with very little upside potential.  As always, we remain committed to you, our clients, and will continue to do our best to help you achieve your financial goals.

Wishing you continued success and happiness for the rest of 2010.