Our economic outlook

An editorial opinion 
by Derek Vogler, CFA^® 
Vice President - Wealth Management

April 10, 2012

Economic data in the U.S. continues to improve, albeit at a moderate pace. Labor and housing markets are both showing some long-awaited signs of healing, although recent numbers have been lower than expectations. Retail sales have also been decent, although the growth has slowed somewhat from levels seen in 2011. These factors, coupled with hope for resolution to issues in Europe and continued accommodative global monetary policy, sparked a rally in equity prices around the world. On the back of a double-digit gain in the fourth quarter of 2011, stocks posted their best first quarter return since 1998. The S&P 500 Index advanced 12.59% while the EAFE International Index rose by 11.00%. Recently, stocks have given back some of the first quarter gains, with the S&P up about 10% as of this writing.

Here in the U.S., the markets were driven primarily by financial, technology and retail stocks. Many of the worst performers during 2011 came roaring back with massive gains. The best S&P 500 performer during the quarter was Sears, surging by 108% (down 55% last year). Bank of America was another example, registering a whopping 72% return after dropping by 58% last year. Notable tech darlings such as Netflix, Priceline.com, Salesforce.com and Apple all posted gains of 48% or more during the quarter - amazing moves in such a short period. 

Has the all-clear sounded so everyone can now jump back into the stock market? We aren’t sure of that. First of all, complacency from investors is unbelievably high. A snapshot of this complacency can be seen by looking at the VIX volatility index. Essentially it shows that investors aren’t afraid of a significant pullback. This seems strange to us given some of the potential dark clouds that continue to form. For example, we have rising gasoline prices that could easily stunt consumer spending, China has been showing signs of a slowdown, and the European mess still seems far from resolved. Spain and Portugal are having trouble reducing spending, which is causing interest rates on their debt to climb. The bond market appears to share our concerns with rates hovering near all-time lows. Yes, yields have increased slightly, but with the 10 year Treasury still hovering just above 2%, it’s tough to say that the bond market indicates everything is rosy. Even if none of these issues stop the market progress, there is good reason to believe a short-term pullback might be in order. Rarely has the market had the type of percentage gain seen in the last six months without a correction. If we do see a pullback, we are ready to take advantage of any compelling investment opportunities that arise.

While a short-term retrenchment in stocks is probably due, we are modestly optimistic that many of the gains we’ve seen this year can be held or even increased. The key could be continued economic expansion and no further significant increase in gas prices. The upcoming Presidential elections, along with all of corresponding political promises, could also be positive. Candidates will likely pull out the same old playbooks of promising everything to everybody. Not to disparage any politician or political party, but when was the last time you heard anyone who wanted to get elected talk about how rough things will be under their watch? I’m sure we’ll hear a lot of discussion about lower taxes, more jobs, business investment, etc. As long as there aren’t too many questions about how these things get done, the markets will probably react positively.

People who achieve financial security rarely do so alone

With all of the current economic uncertainty, this is a perfect time to contact your financial representative for an in-depth review of your situation. Backed by a team of experts, your financial representative is equipped to give you the guidance you need.