Last Quarter Round-Up  

Last quarter's outlook was based on my concern that near-term economic data might disappoint and the market pull back, combined with an expectation of a buying opportunity and return to positive momentum.  The pull-back did occur, but for reasons beyond economic data.  Blame the pull-back on the Japan tragedy and Middle East tensions.  Nevertheless, it did prove to be a good buying opportunity, as the S&P recovered to 1,326, a 5.4% gain for the quarter, and only slightly below the mid-quarter high of 1,343.  Overall, positive market momentum continued with the help of the U.S. Federal Reserve Bank (Fed).  I believe the Fed's quantitative easing (QEII), mentioned in last quarter's newsletter, has had substantial market impact.  On the downside, the employment picture, while improved, remained very marginal and the unemployment rate is barely under 9 percent.   Housing continued to disappoint not only in the number of transactions, but also with the level of prices, which went lower and appear to have not hit bottom.  Finally, inflation has been looking more like a reality than just a concern.  Headline prices have moved up, particularly in food and energy, which has or will affect everyone's bottom line.  The equity strategy last quarter was to hold equities with more normal allocations, but add to equity hedges.  The fixed income strategy was to reduce long and short bonds and add to inflation protected bonds.  Quarterly asset class results: Growth -10.54%; Value +9.89%; Long bonds -2.11%; Short bonds -0.27%; Inflation Prot. Bonds +1.53

Current Quarter Outlook

There's an old adage on Wall Street that says "Don't fight the Fed!"  That advice seems to be playing out as we experience a robustly bullish stock market during what most would describe as a slow economic recovery.  Federal Reserve Bank-induced low interest rates and fiscal stimulus are enough to hold the market...for now.  My feelings for the coming quarter are that the slow recovery will continue.  I think momentum is building in employment, though it won't be gangbusters.  Companies have shown how their reduced workforce and lower labor costs have resulted in record high corporate profits.  They won't want to give that up sooner than necessary.  Housing will continue to disappoint with respect to home prices, but the number of transactions should improve with the seasonal change.  Inflation is something that I fear is going to suddenly drop into our laps with an unexpectedly high Consumer Price Index (CPI) reading.  It may not be this quarter, but I fear it is lurking.  Finally, I expect the stock market to maintain its current level or possibly move higher at least until June.  The end of June marks the expected end of the Fed's QEII program.  Much attention will be focused on the Fed to see if they end QEII or proceed with more stimulus in the form of QEIII.  My equity strategy is to hold equities with an overweight to large caps and value.  For fixed income, I intend to add to inflation protected bonds and alternative fixed income positions.