The Markets Spent Much of the First Quarter Climbing a Wall of Worry

Equities had spent much of the quarter rising despite negative news on all fronts before falling back and starting again. After returning in February to levels last seen in June 2008, U.S. equities turned volatile, as the world watched riots in Egypt, unrest in Libya and earthquakes and a tsunami in Japan.

Global unrest peppered with encouraging U.S. economic news caused the Dow Jones Industrial Average to slide below 12,000 before rebounding to turn in the quarter’s best performance. The Standard & Poor’s 500 Index also lost its grip on 1,300 before its late-March rally returned the index to just below its February high.

For the first quarter 2011, the Standard & Poor’s was up 5.4%.

• The Energy sector led the rally with an increase in oil prices.
  • West Texas Intermediate Crude (WTI) oil is around $105 a barrel.
    • It is cheaper than Brent Crude, because of an excess supply of WTI while Brent supply has been negatively impacted by Middle East unrest.
    • The hub for WTI is easily accessible to our domestic market and provides a better grade product, but it is not exported.
  • Egypt’s Light Sweet Crude is exported to areas that have less efficient refineries than those in the United States.
    • The United States was generally not affected by any decrease in Egypt’s exports.
  • Industrials followed with a near 8.3% gain for the quarter.
  • The poorest performers for the first quarter were Consumer Staples, up 1.9% and Utilities up 1.8%.
    • Utilities is a historically slow growing sector, slow steady returns are the norm.

Solid fundamentals are underpinning the recovery.

• Good earnings were behind the market’s rally for the quarter.
  • S&P Companies averaged more than 35% growth in earnings for the fourth quarter of 2010 (reported first quarter 2011).
  • S&P 500 earnings growth led by financials sector with over 800% growth.
    • Recovery from financial grief can lead to some impressive numbers.
  • The market was able to brush off a lot of bad news rather quickly.
• Jobless claims have remained under 400,000.
  • A sign that the economy is adding jobs.
    • ADP’s report from March 30 revealed more than 200,000 jobs added.
    • The Department of Labor announced Friday, April 1, the U.S. economy added 216,000 jobs in March.
    • The unemployment rate fell to 8.8%—the lowest level in two years.
  • A growth in jobs has been the one factor missing from the recovery.
    • Hopefully an increase in jobs will help boost the housing market.
• The housing market tanked much of the first quarter.
  • March 29 Case-Shiller Home Price Index revealed home prices fell again in January.
    • Fall has been constant since August 2010.
    • Atlanta was among the cities where home prices fell to their lowest level in more than 11 years.
  • New mortgage lending rules were unveiled this week.
    • The Dodd-Frank Financial Regulation bill requires banks to hold 5% of the credit risk for mortgages and other loans that are securitized.
    • It does not make sense that every loan with less than 20% down is considered non prime.
    • The purpose is to have banks do a better job ensuring the quality of its loans if they are packaging them up and selling them to other investors.

We are not worried about Portugal and Greece’s downgraded debt.

• The S&P downgraded both countries citing fears the two may have to restructure their debt and force losses on bondholders after 2013.
  • The European Central Bank has a backstop in place of pooled emergency money.
  • We suspect the Eurozone will not let the countries default.

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