Last Quarter Round-Up  

Last quarter I described my sentiment as a bit more complicated than normal. Overall, I felt 4th quarter GDP would be an improvement, but that a slowing of economic numbers would develop over time. I expected the market to be positive early, then slow or pull-back as the quarter advanced. For the most part, these expectations played out as the S&P 500 index was up until about mid-March, when it went flat to close the quarter at 1,408. Still, that is an impressive gain of 12% and reflects a level the index has not seen since April 2008. Leading economic data has indeed weakened, though not dramatically enough to create a pull-back.

One of the expected "complications" from last quarter was what would happen in Europe. Thinking back to January, we had no idea how the situation in Greece would play out. Many predicted, including myself, that Greece would default, which it did. What we didn't know was how the rest of the continent would respond. I suggested we may see heroic efforts from one or more Central Banks, and that is exactly what happened. The European Central Bank (ECB) created a very clever bank "bailout" program called the Long Term Refinancing Operation (LTRO). This program was compatible with all the various European Union treaties and offered the necessary liquidity to the banking system to avoid contagion during the Greek default. It is an ingenious program that I believe falls short of being a complete solution, but clearly has reduced short-term risks. 

Current Quarter Outlook

Whenever the stock market has a dramatic move as we saw over the first quarter, projections normally go one of two ways: (1) a correction is at hand, or (2) hurry and get in before you miss it. While it is true that after a 12% positive run a pull-back of even a few percent is very possible, the markets just don't work that way. The "correction" could just as easily come after the market is up 15% instead of 12%. On the other hand, "hurry and get in" misses the point that good investing means buying low and selling high. Valuation is important. And, while buying into a market that is up 12% may still be buying low, it certainly isn't as low as it was three months ago.

Overall, I believe the U.S. economy is recovering. Yes, leading indicators have softened, but fluctuation is a natural part of a normal economy. Employment is improving and retail sales have been surprisingly good. Even the housing market has seen activity increase. The data suggests that the massive easing (i.e. cash injections) put into the economy by our Federal Reserve Bank (Fed) has helped the economy stabilize and even recover to a degree. Further, the message from the Fed is clear that they will ease further at the first signs of economic stress. Thus, I expect we will see another round of Fed easing, a.k.a. QE3, in April or June. My equity strategy for the quarter is to maintain equity exposure, while adding to international investments. For fixed income, I intend to add to corporate bonds, reduce cash levels and reduce U.S. Treasury exposure.