First Quarter Review
The first quarter of 2010 saw the world equity markets continue their bullish ways while the fixed income market experienced modest gains. Below are the first quarter total returns for the major indices.
Dow Jones Industrial Average 4.99%
S&P 500 5.39%
S&P Mid Cap 9.09%
Russell 2000 (small cap) 8.85%
International Stocks (MSCI EAFE) 0.94%
High Yield Bonds (Merrill) 4.82%
Aggregate Bond (U.S. Barclays) 1.78%
The trends that began lifting the equity markets one year ago continue to boost share prices. Corporate earnings are surprising the market to the upside and the U.S. economy has halted its downslide. For the Dow Jones Industrial Average this quarter marks the fourth consecutive quarterly gain and this quarter is the best start to a year since 1999. Unfortunately, individual investors may be missing this rally as they are pouring money into bond mutual funds while staying away from equity mutual funds. Similar to last year’s results, the more volatile small and mid-sized stocks outperformed larger cap stocks. International stocks posted small gains as turmoil in Europe and the threat of tighter monetary policy in China cooled investor appetite for foreign stocks. Commodity prices had mixed results in the first quarter.
The fixed income market returned to a more normal state in the first quarter after two years of extremely volatility. U.S. Treasury Bonds, corporate bonds and mortgage backed securities are beginning to move in the same direction once again. The short end of the yield curve is currently locked down by the Federal Reserve’s Monetary Policy while interest rates on the long end of the yield curve are starting to move higher fueled by investor concerns of inflation and eventual economic recovery.
As the second quarter gets under way, stocks face perhaps their biggest hurdle of the year. At some point, the Federal Reserve will need to reverse its unprecedented easing of credit. If the Fed’s removal of credit-market supports fail to go smoothly stocks could move lower. On a positive note, corporate balance sheets in good shape and valuations reasonable, so the bullish momentum may well continue into the second quarter.
Trying to predict the direction of the market usually impossible, but building a long-term investment portfolio designed to meet a client’s risk tolerance and long-term investment objectives is not. Now is a great time to review your investment portfolio to see if it is in sync with your long-term plan.