 | | Market$ in Review | The Market$ in Review newsletter provides an overview of the past quarter's performance and trends. Major impacts to the markets and economic indicators are discussed to give insight into market reactions. For detailed monthly economic information, view the economic updates. First Quarter 2012
Strong start for equity markets in 2012 Investors welcomed an excellent start to the equity markets coming off 2011, a year that saw significant volatility and nearly flat returns for domestic equities. The S&P 500 Index returned 12.6%, its best first quarter return since 1998. Positive trends in several economic indicators, as well as a sense of calm in Europe at the time, led investors to move away from safer assets and into the equity markets.
The European Central Bank continued to pour money into European banks in their program called Long Term Refinancing Operation (LTRO). The program aimed to drive down funding costs in countries such as Spain, Portugal, and Italy, where interest rates had risen late last year to levels that many economists believed were unsustainable.
In the US, investors experienced an unemployment rate that continues to decrease, rising consumer confidence, and strong corporate earnings. The strong start in the equity markets is a positive sign for long term investors, but we are quick to remember the strong start of 2011, which ended with significant volatility and little appreciation in equities. Fixed income markets mostly positive The fixed income markets were generally positive during the first quarter, however Government bonds fell into negative territory toward the end of the quarter as interest rates rose. In its most recent statement, the Federal Reserve noted the economy was improving and there was no additional asset purchase plans at this point in time. This statement, along with investor confidence in the economy, sent interest rates higher in March.
More risky fixed income asset classes such as high yield debt and corporate credit fared better, as investors searched for higher yielding investments. With the threat of rising interest rates, fixed income investors should be aware of lower return expectations from bonds. The exact timing of higher interest rates is still unclear; however, the Federal Reserve has signaled they will begin raising short-term rates in 2014.
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