Concerns about Europe and the global economy set a negative tone last week and markets closed out at a loss. The S&P lost 1.15%, while the Dow lost 1.67%, and the Nasdaq 0.76%. On a positive note, the U.S. economy continues to slowly improve as evidenced by a surprisingly positive consumer sentiment report, showing that American consumers are still upbeat about the economy. Jobless claims held steady for the week and some analysts speculate that the unusually high unemployment claims seen in the first weeks of April were the result of seasonal adjustment and not actual job losses. Earnings season is winding down, but a few key players such as Disney, Macy’s, and Kohl’s posted better-than-expected earnings. (These opinions are not to be construed as investment advice)

Eurozone troubles were at the core of investor concerns last week as realization dawned that in order to keep the European Union (EU) together, the European Central Bank (ECB) will have to pump trillions of euros into the monetary system. Germany is likely to face high inflation rates for the next few years as it struggles to help the economies of its partner countries. Still haunted by the hyperinflation of the early 1920s, German voters may balk at the spending required to keep the euro afloat, pressuring politicians to balance needs with voter concerns – something that is never easy to do.

The recent European elections may also make it difficult for Europe to make headway against its debt troubles. Hollande, the new Socialist president in France, has promised voters not to continue with strict austerity measures. While this is appealing to the masses, it could lead to additional downgrades on French debt, thus making problems worse. In Greece, the majority parties won less than 35% of the votes, giving significant headway to fringe parties. This development, combined with popular sentiment so opposed to necessary austerity measures, has made it increasingly likely that Greece will leave the Eurozone. While the EU can probably survive the exit of Greece, in order to preserve its integrity, it will be critical for the ECB to prevent the default (and exit) of Spain or any of the larger economies. The ECB is the only entity in Europe with the power to save Spain from default – however, the only way to do so is by printing a ton of money, and risking inflation and currency devaluation.

What all this means for U.S. investors is this: The crisis in Europe is far from over, and we should not be surprised by volatility and uncertainty right now. If European politicians, nervous about losing elections, refuse to make hard budget decisions, Europe’s crisis may deepen and threaten the stability of the euro. It is impossible to know what the future holds for Europe, but with every downside usually comes an upside somewhere else. We work hard to identify those upsides, and to adjust our clients’ investment strategies where necessary. Thank you for the trust you’ve placed in us.

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized.
Sources: Yahoo! Finance, MSCI Barra. Past performance is no guarantee of future results.
Indices are unmanaged and cannot be invested into directly. N/A means not available.

Last week was a rough one for U.S. stocks. The markets started off the week positive, pushed upward by positive corporate earnings, but retreated the last three days to close at a low point, hammered by a disappointing jobs report and renewed fears about a stuttering economic recovery. The S&P lost 2.44% – its worst weekly performance this year, while the Dow lost 1.44% and the Nasdaq fell 3.68%.

The week’s sell off began on Wednesday when the latest ADP Employment Report – usually released before the official Labor Department report – suggested that employment had improved by less than expected. The news was confirmed on Friday when the official numbers showed that employers had added just 115,000 jobs in April, falling well short of the expected 170,000 new jobs. Although the unemployment rate dropped to 8.1%, we can’t get excited about it because the fall is primarily due to job-seekers giving up their job search.  If we see continued slowness in the job market, it is possible that the Federal Reserve will step up efforts to boost the economy again. Since inflation is still well below the danger zone, the Fed still has room to take action.

Solid corporate earnings have provided a breath of fresh air, showing that business is still humming along. First-quarter earnings among companies in the S&P 500 are currently at 7.8%, well ahead of expectations. However, companies are forecasting a much slower second quarter, a sign that executives are bracing for declining sales.Analysts believe that a warm March and an early Easter may have shifted sales to March, cutting into second quarter revenues. Please also keep in mind that companies often sandbag their forecasts in order to artificially beat expectations when the official earnings are posted.

Last week’s poor market performance and disappointing jobs report reminds us that our economy and investors nerves are still “recovering.” Just as an injured person who undergoes a major surgery will have good days and bad days while recovering, so our healing economy will experience ups and downs

The trading week started off slowly as investors absorbed further troubling news about the state of the global economy: Disappointing manufacturing reports from China, France, and Germany, plus news that the Netherlands might be heading for its own fiscal crisis. Things turned around later in the week though, as domestic equities closed higher on positive news surrounding U.S. corporate earnings. The Dow managed to recoup all its April losses, closing up 1.53% for the week, while the S&P rose 1.80%, and the Nasdaq gained 2.29%. For the moment, corporate earnings are providing a positive counterpoint to lackluster economic news.

The state of our nation’s economy was also in the spotlight last week. Gross Domestic Product (GDP) grew by 2.2% in the first quarter, down from 3.0% in the fourth quarter of 2011. The biggest factors in the slowdown were slower inventory-building by private companies and less defense spending by the federal government. Thankfully, consumer spending – the largest contributor to GDP – is still strengthening, which should lead to ongoing improvement in our overall economic picture. In keeping with its upbeat tone, the Fed added 20 basis points to its 2012 GDP forecast, increasing predicted growth to between 2.4%-2.9% this year. The Fed also agreed to keep interest rates between 0.00%-0.25%, and expects inflation to remain below 2.0% for the next two years. During the follow-up press conference, Chairman Ben Bernanke stated that the Fed was still prepared to take an active role in the recovery.

Unemployment claims continue to remain near a three-month high, indicating that employers have stepped-up layoffs and are reluctant to increase hiring. However, economists believe that the mild winter distorted first-quarter hiring, making it appear unusually strong. Overall, the economy has continued to add jobs and unemployment is falling well ahead of estimates.

Regardless of what happens with short-term market movements and news from abroad, we are grateful to see that the U.S. economy is recovering from the financial crisis better than any other economy in the world right now. This is likely a major reason why we have seen domestic equities performing so well lately – when compared with the rest of the world, U.S. companies are the prettiest girl at the dance. While there are sure to be bumps in the road ahead, corporate balance sheets are strong, the job market is slowly improving, consumers are still spending, and our economy is chugging along.

Strong corporate earnings caused stocks to rally last week for the first time this month. The S&P closed up 0.6% for the week, while the Dow closed 1.4% higher, and the Nasdaq trimmed 0.36%. With no domestic economic reports released on Friday, traders turned their attention back to lingering concerns over Europe and China, and markets lost some momentum in afternoon trading. Even so, last week’s positive earnings reports are alleviating concerns about the economy and making investors feel more confident about the rallies we’ve seen this year. With 23% of S&P 500 companies having reported results so far, more than four out of five have beaten expectations by an average of 8.8%. Profit growth in this quarter has also been up 6.2%, according to Thomson Reuters Proprietary Research.

While some analysts are concerned that stocks are poised to repeat their 2010 and 2011 performance – when a mid-year retreat followed an April peak – there are many differences between the economy of the past two years and today. The 2010 and 2011 pullbacks largely occurred because of recession fears and shocks created by the Japanese Tsunami, but the U.S. economy is on more solid footing than at any other time in the recovery. Current indicators point to slow and steady economic growth, and we have already moved away from index highs. If we continue to see positive earnings among the nearly 180 S&P 500 components reporting next week, we may see markets sustain their upward trajectory.

Investors will also be closely watching Tuesday’s meeting of the Federal Reserve FOMC. With an optimistic economic outlook and improving jobs situation, it is unlikely that the Fed will conduct another round of bond purchases. Even so, we will be monitoring the Fed’s statement on Wednesday, and will be certain to fill you in on any outstanding developments. We hope you have a great week!

HEADLINES:

Spain’s bond auction sees strong demand from investors. Spain’s central bank sold all the 2.54bn euros of bonds it was offering, with demand higher than expected. These eased global worries about Europe’s lingering debt problems and shows that investors are eager to snap up bargain-basement debt.

Fewer U.S. states reported job gains in March, indicating a slowing of job growth nationwide. According to Labor Department figures, 29 states reported job gains last month while 20 states lost jobs. In more positive news, the unemployment rate fell in most states.

Sales of previously-owned houses dropped in March, despite low mortgage rates. According to National Association of Realtors figures, home sales fell last month by 2.6%. Seasonal factors might be behind the disappointing figures: the first months of 2012 were the strongest in five years, indicating that a mild winter may have encouraged buyers to close earlier, stealing sales from March.

High energy prices may be slowing rural economic growth. According to the Rural Mainstreet survey, higher energy and fuel costs are slowing growth in 10 Midwest and Plains areas dependent on agriculture. Slowing global demand for key crops may also be having an effect on growth.

It was a rough one for the stock market last week as major indices closed out their worst session of 2012 on the back of disappointing economic growth in China and renewed fears about debt-ridden Europe. The S&P fell 2% for the week, while the Dow lost 1.61%, and the Nasdaq closed down 2.25%.

China, the world’s second-largest economy, reported first-quarter growth figures of 8.1%, the weakest rate in nearly three years, and below expectations of 8.3%. Stocks fell sharply on the news, stoking fears that a weakened Chinese economy could have global implications. Concerns surrounding Spain’s debt offering next week renewed fears about the European debt crisis, battering bank stocks and dragging down the euro against the dollar.

On the other hand, domestic indicators continue to provide a positive contrast to global worries. The most recent Beige Book report released by the Federal Reserve shows that the U.S. economy is improving at a “modest to moderate” pace as solid auto sales, warm weather, and growth in high-tech manufacturing outweighed the effect of high gasoline prices. Sales by U.S. wholesalers rose 1.2% in February, and they restocked their inventories at a faster rate in February than January, suggesting they expect a strong spring. Consumer confidence likewise grew in February by the most in seven months. This is especially good news since consumer spending drives nearly 70% of domestic economic activity; if consumers keep spending, the economy will continue to improve.

Domestically, the U.S. economy really seems to be chugging along, and indicators continue to support a broad recovery. Nevertheless, concerns about the fragile global economy will likely lead to continued volatility in equity markets. The declines experienced over the last two weeks are not difficult to comprehend in light of the outstanding first quarter performance we experienced. In the weeks ahead, analysts will be examining quarterly earnings reports to determine whether the pullback has been exhausted, or if we should expect continued profit taking.

As always, when short-term declines test your resolve, it is critically important to remain focused on your long term objectives and trust that the portfolio strategy you have in place can weather a few squalls.

 Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance, MSCI Barra. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not available.

Following the strongest quarterly performance since 2008 and the best first quarter performance since 1998, major indices retreated this week, weighed down by disappointing economic reports and renewed concerns over Europe’s debt crisis. The string of losses before Friday’s market holiday left the S&P, the Dow, and the Nasdaq all slightly lower. This is only the third weekly loss for the stock market in 14 weeks of trading.

A positive ISM Manufacturing Index report pushed stocks higher on Monday, but sentiment shifted on Tuesday as the Fed’s FOMC meeting minutes revealed that because of an optimistic view of the economic recovery, the Fed is unlikely to buy bonds to further stimulate the economy. It should not come as a surprise to investors that the Fed’s monetary policy is conditional on economic developments. If the economy takes a turn for the worse, there is little doubt that the Fed will step in again. Interestingly, you might be inclined to think that an optimistic view from the Fed would be good for stocks, but this highlights that stocks move for a variety of reasons not always linked to economic performance and pundit predictions.

Friday’s employment report indicated that jobs growth had slowed considerably in March, but there were also significant positive signs to be found in its pages. The unemployment rate dropped, and the underemployment rate – which counts jobless people looking for work, part-time workers who want full-time jobs, and discouraged job seekers – fell to a three-year low of 14.5% from 14.9% in February, one of the largest monthly drops on record. This is a key number in the government’s monthly employment report, and it’s one that we are happy to see moving down.

Concerns surrounding Europe’s sovereign debt crisis flared again after Spain’s latest debt auction drew underwhelming demand, and yields on Spanish government bonds rose on fears that they may have trouble paying back their debt. Clearly, more time will be needed before we can put this drama behind us.

This week’s losses were not at all unexpected. Mediocre economic reports, lingering doubts about the Fed’s future monetary policy, and renewed concerns about Europe’s problems all played a part in the retreat. We might see further losses in the weeks to come, but let’s keep focused on the underlying trends: the U.S. economy is improving, the job market is improving, and we are on track for a solid year of economic performance. When short-term losses threaten your peace of mind, focus on your long-term strategy and remember that we are actively monitoring the economy and world equity markets, and will keep you updated.

When the closing bell rang on Friday the 30^th, the Dow and the S&P closed out their best first-quarter performance since 1998 and the Nasdaq notched its best performance since 1991.

After a string of declines last week, the markets showed modest gains on Friday amidst economic reports indicating that U.S. consumer spending and consumer sentiment are still on the rise. Consumer sentiment rose in February by the highest level in seven months and March consumer confidence bounced to its highest level in more than a year. U.S. Treasuries fell as investors left the refuge of debt to participate in the market rally.

While we’re pleased at the good economic news and the close of a strong quarter for equities, we’re also paying close attention to reports due to be released later this week which include data on manufacturing and construction spending, reports on the labor market, and Fed FOMC meeting notes. With market optimism so high, any mixed news could leave stocks vulnerable to a retreat. If a pullback does occur, many analysts believe that it will be a healthy sign of reduced investor exuberance. However, a retreat is certainly not a given. Historically speaking, the S&P 500 has only gained more than 10% in the first quarter on eight other occasions since 1945, and the market went on to gain in the second quarter six of those eight years.

We’re thankful to see that the picture in Europe has improved somewhat during the first quarter, and the market has rewarded this improvement. Though a permanent solution is still needed, the European Central Bank has managed to avert a liquidity crisis for now. We look forward to further steps being taken to address the underlying solvency issues that still exist.

Rising gas prices continue to be an area of concern, as any further pinch at the pump could lead to decreases in consumer spending, slower retail sales, reduced manufacturing, cuts in hiring, and ultimately to a slower moving economy (Likely in that order). This is clearly not something we want to see. Oil prices – and gas prices by extension – are predominantly affected by supply and demand. And with only 2 million barrels a day of effective excess capacity, versus global oil demand of 75 million barrels a day, it is easy to see why prices remain elevated. Tensions over Iran exacerbate this problem, as any escalation there could easily lead to dramatic spikes in prices here. On the other hand, if the Iran situation cools off, we could also see oil prices fall. As we have mentioned before, oil prices teeter delicately on a combination of supply issues and speculation.

Comments made by Federal Reserve Chairman Ben Bernanke on Monday suggested that the Fed would like to see a more rapid expansion in the economy, and it’s willing to back up its words with additional quantitative easing. Whether or not that would be a good thing is heavily debated, and there are extremely vocal proponents on both sides of the issue. We’ll reserve our thoughts on that matter for a future edition. Either way, if we continue to see solid economic reports and improvement in the global economic situation, the Fed will probably not take further action.

The important thing to keep in mind is that the long-term performance of your investments is not tied to short-term market movements. All the underlying signs point to a continued economic recovery, and we are closely monitoring available information as we chart our course for the next quarter and beyond.

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized.
Sources: Yahoo! Finance, MSCI Barra. Past performance is no guarantee of future results.
Indices are unmanaged and cannot be invested into directly. N/A means not available.

Stocks edged higher on Friday after a rough week marked by positive economic news in the U.S. but troubling economic news from Asia. For the week, the S&P and Dow notched their biggest losses of the year, 0.5% and 1.1%, respectively, while the Nasdaq edged up by 0.4%, bolstered by positive earnings in tech stocks.

 Despite reports of increased strength in the American jobs market, improved corporate profits, and strong consumer sentiment, some investors feel increasing worry about Asia, Europe, and the impact higher oil prices could have on consumer spending. New reports show that China’s manufacturing sector is slowing due to reduced global demand; in Europe, Ireland slipped back into recession; and oil prices briefly spiked to the highest level in three weeks on Friday, following a report that Iranian oil exports dropped significantly this month.

 The markets have posted solid returns in 2012, with the S&P up 11.09% this year. While some data indicates that we are poised for a decline, other data indicates that the markets are likely to move higher. So is it time to pull out of equities and lock in profits? Or is it better to ride things out in hopes the markets will advance further?  The short answer is that no one can say for sure. Stop and consider for a moment – if the market has peaked for the year, it would be the S&P’s cheapest price/earnings ratio in the last 34 market peaks. Furthermore, underlying trends suggest that the global economy is improving, potentially leading to further gains in the latter half of the year. According to a recent report by Ned Davis Research (NDR), a second-half recovery might send markets to levels not seen since 2007.

 While it’s only natural to worry about turbulence in the market, it is important to take a deep breath and focus on overall trends and sticking to an active, long-term investment strategy. The media loves to hype stories – that’s how they get ratings. Shrewd investors, on the other hand, understand that markets move up and down, and that buying into the hype can be costly. With the news about weakening economies in Asia, we should probably expect some short-term consolidation, but that doesn’t mean drastic action should be taken.

 Just because the major equity indexes are advancing or retreating, it doesn’t necessarily mean our clients’ personal investments are advancing or retreating. We don’t buy the markets, and we don’t try to time the markets. There are worthwhile investments to be found in almost every market environment, and these are the ones we aim to utilize.

Stocks closed flat on Friday, but all the major indices posted gains of more than 2% this week, their largest one-week advance this year. The week’s gains were primarily driven by a string of positive U.S. economic reports and signs of life in the banking sector.

Following Tuesday’s FOMC meeting, the Federal Reserve appears cautiously upbeat about the economy, though Fed Chairman Ben Bernanke acknowledged that the recovery will be a slow one and announced plans to keep the federal funds rate between 0.00% and 0.25% through at least 2014. The Fed has held interest rates near zero since December 2008 in an attempt to spur economic growth through access to cheap credit. By continuing to keep rates low, the Fed is indicating that they are taking a wait-and-see approach to the economic recovery.

Friday’s mixed trading came as traders absorbed economic reports on inflation, industrial production, and consumer sentiment. Inflation rose by 0.4%, pushed higher by rising gas prices. According to the report, consumer prices (a measure of inflation) were up 2.9% from this time last year, which is only slightly higher than the Fed’s 2% target. Part of the Fed’s job is to keep inflation from getting out of hand; if the inflation rate rises too high, it’s possible that the Fed will raise interest rates to push it back down.

Industrial production remained disappointingly flat in February after December and January gains, and the University of Michigan Consumer Sentiment Index dropped one percentage point from February’s high of 75.3, as the year’s high gas prices squeeze household budgets. Unfortunately, we can probably expect higher gas prices as we head into the summer travel season, which will continue to put pressure on the economic recovery. While gas prices don’t appear to be affecting retail sales yet, it is possible that consumers will start curbing spending if gas edges much over $4. This year’s high gas prices are largely due to fears about a confrontation with Iran, so continued saber rattling could send prices higher. Of all the factors in play right now, gas prices are definitely a wild card, and one we’re keeping a close eye on.

Three years ago Friday, the Dow Jones Industrial Average saw one of its darkest days. Closing at its Great Recession low of 6,547, investors cringed to see how far stocks had fallen from their October 2007 high of 14,164. Since that day, we’ve experienced one of the greatest three-year runs in the history of the stock market, superseded only by the dot-com craze of the late nineties and the recovery from the Great Depression.

Stocks have returned with remarkable resilience. Between the “flash crash” of May 2010, the European financial crisis, the downgrade of the U.S. credit rating by Standard and Poor’s, fear of default by the U.S. government, high gas prices, and supply disruptions surrounding the Japanese tsunami, it’s amazing we’ve made it to where we are.

When you look at both the climb we’ve seen and the challenges we’re facing, it’s not surprising that many analysts are calling for a pullback in the near future. Even so, stocks managed to hold their own last week. After a couple of rough days, Wall Street logged three winning sessions on the back of a better-than-expected employment report. The S&P eked out a gain of 0.1% for the week, while the Dow dropped 0.4%, and the Nasdaq gained 0.4%.

While Friday’s jobs report was hotly anticipated, the market’s reaction to it was surprisingly muted. The Labor Department reported that 227,000 new jobs were created while the unemployment rate remained the same as February’s at 8.3%. If so many new jobs were created, why is the unemployment rate the same? Well, while new jobs were created, the total number of job-seekers increased as more people began actively looking for work. When the job market improves, people who had previously dropped out of the hunt start applying for jobs again, affecting the unemployment rate. Clearly, while the employment situation is actively improving, we still have a long way to go.

Also supporting market performance last week was news that Greece succeeded in convincing bondholders to swap their old bonds for new ones valued at much less. In accomplishing this, Greece cleared a major hurdle to avoiding a disorderly default.

We are living during one of the most interesting times in history. Each week, as we analyze the stock market and the economy, we find both positive and negative factors to weigh when making investment decisions. We strive to do this with diligence and skill. All things considered, we trust that the same resilience that brought us to Friday will carry us into the future; even though there are sure to be bumps along the way.

HEADLINES:

China has approved a $2.9 billion investment by 23 foreign institutions in its capital markets. As the Chinese economy shows signs of slowing, central bankers look to foreign investors to pick up the slack. China now has a total of $24.6 billion by 129 foreign institutional investors invested in its capital markets.

Crude oil futures rose past $108 a barrel Friday, buoyed by a good U.S. jobs report and positive news from Greece. Crude has risen from $75 a barrel in October and $96 a barrel last month on the back of rising tensions with Iran and positive economic news.

States that were hardest hit by the real estate collapse are now leading the U.S. labor market growth. Arizona, California, Florida, and Nevada accounted for 28% of the increase in U.S. employment between August and December 2011, according to Labor Department figures.

Credit Suisse is bullish on homebuilder stocks, behind the outlook is improved buyer traffic, record affordability, and improved buyer confidence, leading to increased activity in the housing market.