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Markets set stage for best quarter in more than Two Years

 

F&M Investment Services - Raymond JamesClarksville, TN – The first quarter of 2012 enjoyed a period of relatively lower volatility as the Dow Jones Industrial Average rose to 13,212.00 points, setting the stage for the best quarter in more than two years. Rising, too, were 25 of the Dow’s 30 components.

Not to be left out, the S&P 500 was up 12% at the end of the quarter – its largest first-quarter gain in more than 10 years – after it rose to 1,408.47 points. Rising most among its 10 major industry groups were consumer-related and healthcare sectors.

Economic growth for the quarter is expected to be about 2.1%, down from the 3% growth rate reported by the government for the last three months of 2011. But most economists expect growth to be better than 2.1% for the rest of the year. And most think it unlikely 2012 will see a quarter with little or no growth. An average of 245,000 jobs a month were added to the economy from December through February. The result: an unemployment rate drop to 8.3%, the lowest in three years.

February saw the highest rate of consumer spending in seven months. The Commerce Department reported consumer spending rose 0.8% in February. Income grew 0.2%, the same weak increase that was seen in January. Further job gains are needed to raise consumers’ income. However, taking inflation into account, income after taxes fell for a second straight month. The savings rate also took a tumble in February, falling to 3.7%, its lowest point in more than two years. Last year saw an average savings rate of 4.7%. Rising gas prices were reflected in the higher spending.

12/30/11 Close

3/30/12 Close

Change

Gain/Loss

DJIA

12,217.56

13,212.00

+994.44

+8.14%

NASDAQ

2,605.15

3,091.57

+486.42

+12.91%

S&P 500

1,257.60

1,408.47

+150.87

+12.00%

 

“Pain at the pump” was an all too familiar news lead throughout the first quarter of 2012. Some of the higher consumer spending reflected steadily rising gas prices. Still, consumers spent more on other goods and services, too. But if you recall, last year, as the economic wheels appeared to gain traction – better job gains and improved spending – gasoline prices rose to more than $4.00 per gallon in early May. Inflation-adjusted consumer spending stalled in late spring and early summer. Whether we see a repeat depends on how high current gasoline prices go and how long they stay there.

On the home front, the housing market may be shaking off its depression-like conditions, reports Freddie Mac. Housing starts averaged nearly 700,000 on a seasonally adjusted annual rate over the November through February period, an increase of 19% over the preceding 12 months. Approximately one half of the housing starts have been for rental apartments in multi-unit buildings. And a hint that home values may be stabilizing, even after a 1% dip in February, median sales prices moved up 0.3% on a year-over-year basis.

The Fed made no changes to its Operation Twist program to replace shorter-term Treasuries in its balance sheet with longer-term debt. Launched in September of 2011, the $400 billion plan expires at the end of June. The Fed also maintained its plan to reinvest maturing mortgage-backed securities into the MBS market and hold its balance sheet steady by rolling over Treasury securities.

Though the news this past quarter has been relatively optimistic, short-term influences and trends stress the value of having a long-term investment strategy to help weather unexpected events. At the same time, it’s a good idea to periodically review your strategy. If you’d like to discuss that – or have any other questions or concerns – please give me a call.


About Frazier Allen

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