• Investing & Markets

Market Digest – Week Ending 3/16

March 16, 2012 | Craig Birk, CFP®

Stocks continued a methodical upward march. The S&P 500 hit its highest levels since the spring of 2008. Fed policy makers raised their assessment of the economy, citing improvement in the labor market. While there was no mention of plans to change interest rate policy, bond holders rushed for the exits. All types of fixed income securities lost value. Gold declined.

Weekly Returns

S&P 500: 1,404 (+2.4%)

MSCI EAFE: +2.1%

US 10 Year Treasury Yield: 2.29% (+13.37%)

Gold: $1,660 (-3.1%)

USD/EUR: $1.317 (+0.4%)

Major Events

  • Monday – China reported lower than expected exports and domestic demand.
  • Tuesday – US retail sales increased 1.1%, ahead of expectations.
  • Tuesday – The Federal Open Market Committee issued a statement with a more positive view of the US economy, but maintained its stance that short term borrowing costs will be kept “exceptionally low” at least through 2014.
  • Tuesday – JP Morgan announced it would buy back $15 billion of its own stock and raise its dividend. Shares of most banks rallied.
  • Wednesday – A departing Goldman Sachs employee became a media sensation by posting a scathing opinion piece in the New York Times, calling the company culture toward clients “toxic and destructive”.
  • Friday – February CPI increased by 0.4%, primarily driven by higher gasoline prices.

Our Take

“Am I missing the boat?”

March Madness brackets and Goldman Sachs’ “moral fiber” may have been the big water cooler subjects this week, but this question was the real issue many investors were pondering – especially those holding mostly cash and bonds.

For the first time since 2007, we see sprouts of greed popping up into the sea of fear that exists among potential stock owners. This is consistent with the middle phases of every bull market. The conversion process from doubters to believers is slow. It can take years before greed is universal. That is the real time to be scared – not now.

Yes, we probably are due for a correction, but the major fundamentals driving stock prices higher (relative valuation, sentiment, streamlined companies, and extremely loose global monetary policy) remain mostly intact. Trying to time corrections is a losing game.

Bond owners, on the other hand, can be rightly afraid. It was a brutal week for fixed income instruments, and there appears to be little support preventing further declines. The 10 year Treasury now yields 2.29%. This is up 25% in just seven weeks, but remains well below its 2011 high of 3.77%.

Bonds should play an important role in most portfolios, but many are too cavalier in their approach. Investors must focus on diversification within their fixed income allocation, capture some inflation protection, and stay conservative in duration.

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