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Economic forecasters sometimes describe the investment markets as a leading indicator, which means that they believe returns can anticipate good or bad economic news. Share prices fall when investors expect a recession, and rise when a recovery is expected-- last year's stock market growth fit that pattern. The market rose last year harder and faster than anybody expected, as did, later, the U.S. economy. On March 26, 2010, the U.S. Bureau of Economic Analysis reported that the U.S. gross domestic product increased at an annual rate of 5.6% in the fourth quarter of 2009, after a 2.2% increase in the third quarter.

Investors couldn't have known during those dark hours of March 2009 that better economic times were around the corner.

U.S. Equity Markets

The U.S. equity markets were generally higher across the board in the first quarter of 2010, which is a terrific contrast with where we were at this time last year. Indeed, CNNMoney.com reported on March 31, 2010, that the returns for the first three months of this year ranked among the best first quarter performances in more than a decade.

A few examples:

The Wilshire 5000 total market index, the broadest indicator of U.S. stocks, was up 6.42% in the first quarter of this year. Most of the action came in March; the index was actually slightly down for January and February, but the final month in the quarter produced a rise of 6.61%.
The Russell 3000 index, another broad measure of U.S. stock returns, rose 5.94% for the first quarter of 2010, bolstered by a 6.30% return in March.
Wilshire's U.S. large cap index rose 5.95% for the quarter, aided somewhat by a 6.36% return in March.
The Russell 1000 index rose 5.70% after gaining 6.14% in March.
Wilshire's Mid-Cap index was up 9.11% .
The Russell Midcap rose 8.67%.
Wilshire's Small Cap 250 rose 9.00%.
The Russell 2000 returned 8.85%.
The S&P 500 rose 4.9%.

There are times when value stocks outpace growth and vice versa, but the results for this quarter were mixed, as, in fact, they were for most of last year. A generally rising tide--and signs of an improving economy--seems to have floated all boats:

Wilshire's Large Cap Index
Growth stocks: up 5.20%      Value stocks: up 6.69%

Russell's Large Cap Index
Growth stocks: up 4.65%      Value stocks: up 6.78%

Wilshire's Mid-Cap Index
Growth stocks: up 8.84%      Value stocks: up 7.9%

Russell's Mid-Cap Index
Growth stocks: up 7.67%      Value stocks: up 9.61%

Wilshire's Small Cap Index
Growth stocks: up 8.97%      Value stocks: up 11.80% (the highest quarterly return)

Russell Small Cap Index
Growth stocks: up 7.61%       Value stocks: up 10.02%

International Markets

All was not quite as positive on the international front, where stock returns of different countries seemed to be everywhere. Alas, we missed the strong stock market rally in Estonia (up 44.7% through 3/25/10, according to the EmergInvest web site) and the 26% run-up in Kenyan stocks in the first quarter. But we also cleverly avoided the 32.2% drop in the Bermuda stock market in the first quarter (through 3/30). Among the surprises: China's A Shares Index dropped 2.6% while Japan was up 6.3% in the first three months of the year.

The EAFE index, the broadest measure of developing nations, reported a relatively calm-looking year-to-date return of 0.22% on the MSCI/Barra web site, and the Far East index was up a robust 6.29% for the quarter. Emerging markets were up 2.11%. Meanwhile, government deficit troubles in Greece, Spain, Ireland and Italy (to a lesser extent) cast a shadow over the European economies. European stocks in the MSCI index were down 2.33% for the quarter.

But remember, all of these returns are in dollar terms. Due to the debt crises across Europe, the euro fell 6.23% vs. the dollar in the first three months of 2010--which means that in euro terms, to investors in Germany or France, the European markets are up nearly 4% so far this year. If the euro strengthens against the dollar at some point in the future, foreign stock returns will be boosted accordingly.

Real Estate Recovery

Real estate continued a recovery that began in 2009 after two very difficult years. The FTSE NAREIT Index (compiled by the National Association of Real Estate Investment Trusts) experienced a total return drop of 17.83% in 2007 and fell another 37.34% the following year. But in 2009, the broad real estate index rose 27.45%, and recorded a 10.60% total return in the first quarter of this year.

Bonds

Even bonds offered positive returns in the first quarter of 2010:
The Lehman U.S. Aggregate Bond index was up 1.64%.
Treasury bonds started the year on a positive note:

o  Government bonds of 1-3 year maturity returned 0.93% on yields of 1.04%
o  3-7 year Treasuries were up 1.24% for the quarter on yields of 2.52%.
o  10-20 year Treasuries were up 1.27% on 4.29% yields
o  Long Treasuries of more than 20 year maturities declined 0.51% on yields of 4.73%.

Commodities

Commodities, as measured by the Dow Jones-UBS Commodity Index, were down 5.05% in the first quarter, but once again this overall trend masks a lot of varying performances. Crude oil was up 3.44% for the quarter, gold was up 1.43%, but corn prices were down 19.43%.

What's Next?

Nobody knows whether this sunny investment climate will continue, or whether the strong market returns over the past 12 months will give way to a new bear market. However, one indicator suggests that we may not be walking into another frightening meltdown like the one we experienced in 2008 and the first two months of 2009. The Chicago Board of Options Exchange measures volatility in the stock market by its VIX index--which is more precisely an expectation of volatility and risk over the next 30-day period, and is sometimes called Wall Street's "fear gauge." On November 20, 2008, the VIX index hit a ten-year high of 80.86, according to data compiled by the IMCA-RC web site. On March 23, 2010, the VIX index closing price stood at a more historically normal level of 16.35.

Thanks to a positive uptrend in March, this quarter's market returns represent one of those unusual periods when just about everything went up. Just a year ago, people were talking about the collapse of civilization. Six months ago there were worries that the economic stimulus package would not be enough to get the U.S. economy moving again; some thought that the country was headed for a double-dip recession.

The economy won't be fully recovered until jobs come back, and the recent stock market rises haven't yet taken us back up to the levels before the Great Recession swept through like a hurricane. But the people who were nervously sitting on the sidelines over the past year, and the past quarter, missed out a nice rally. Let's hope it continues.

For More about the topics in this article:

First quarter returns are higher than most others this decade: http://money.cnn.com/2010/03/31/markets/thebuzz/index.htm
Economic growth rate: http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm
Wilshire Indices: http://www.wilshire.com/Indexes/calculator/
Russell index data: http://www.russell.com/indexes/data/daily_total_returns_us.asp
Bond returns: http://www.lehman.com/indices/dailyreturn.html
International indices: http://www.mscibarra.com/products/indices/international_equity_indices/performance.html
Dollar's rise and fall: http://www.fxstreet.com/rates-charts/
VIX data: http://www.icmarc.org/xp/rc/marketview/chart/2010/
Global Stock Market index returns: http://www.emerginvest.com/WorldStockMarkets/Countries.html
NAREIT (Real Estate) data: http://www.reit.com/IndustryDataPerformance/FTSENAREITUSRealEstateIndexDailyReturn/tabid/77/Default.aspx
Commodities data: http://www.djindexes.com/ubs/?go=index-data
Unemployment data: http://money.cnn.com/2010/03/31/news/economy/ADP_private_sector_payrolls/index.htm?postversion=2010033109