Equity – A shaky start to the year – I think not!
By Chauncey J. Busacker, CFA, VP/Portfolio Manager, ANB Bank, Colorado Springs LIVING WELL Magazine
The first quarter of 2011 was certainly not the calm start many people were hoping for. Social unrest swept through the Middle East escalating to Civil War in Libya. The unfortunate earthquake and subsequent tsunami and nuclear disaster in Japan may result in the planet’s costliest natural disaster. Despite these events the S&P still managed to produce the best start to a year since 1998 by returning 5.9% in the quarter.
While we are hopeful the second quarter will be void of the dramatic events that happened in the previous three months, it certainly will be filled with several key items sure to move markets in the U.S. and abroad. Inflation is quickly becoming a dominant issue in the global economy. Although the key inflation measures that Ben Bernanke and the Federal Reserve watch continue to show muted expectations, oil prices trading well over $100/barrel and food prices rapidly climbing seem to indicate quite a different story. As response to mounting inflation pressure, the European Central Bank raised its target interest rate for the first time since the summer of 2008. As other Central Banks raise interest rates, the Federal Reserve will be under increased pressure to begin tightening monetary policy by raising interest rates in the U.S. The Fed hopes that the economy will be able to continue its growth trajectory when it begins to tighten interest rates.
First quarter earnings that will begin to be reported in the coming weeks should continue to be very strong. Almost without question, corporations are operating on all cylinders. Profit margins at S&P 500 companies are close to record highs and a majority of corporate balance sheets are flush with cash. In the first quarter, equity investors certainly believed that these strong company fundamentals were more important than the inflation concerns. How the equity markets perform in the second quarter will ultimately be determined by how this tug of war shakes out. It is our expectation that markets will continue to be volatile but current company fundamentals still justify the department’s belief that the S&P 500 is on track for low double digit returns for the year.
Fun Fact: Americans eat roughly a pound of fresh food for every pound of packaged food they consume, but the Chinese eat about nine pounds of fresh food for every pound of packaged food.
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