2011 1st Quarter: What happened to the stock market?

capstone-comments-blank-imgFirst quarter of 2011 revealed significant new concerns about the global and domestic economy. One might label this past quarter as the “SEASON OF THE BLACK SWAN”. Black Swans are events in history that occasionally occur without possibility of predicting.

The notable Black Swans of the first quarter were:

  • January – North Africa: 23-year president of Tunisia forced to flee the country.
  • January – North Africa: Uprising in Egypt forced president to relinquish power.
  • March – Japan: Largest earthquake on record strikes followed by deadly tsunami.
  • March – Libya: France, Britain and US attacked Libyan targets.

Predicting these events has lower probability than guessing the winner in January of the NCAA Men’s Basketball Championship which occurs in April. Guessing the market response to the “Black Swan” is improbable as well. The S&P 500 completed the first quarter with a 5.92% gain. Why the optimism?

  • The U.S. economy is continuing to show improvement.
  • The unemployment outlook is slowly improving as corporations large and small are rehiring to increase output demands.
  • Despite the Black Swan events of the first quarter, there was little economic pullback by the consumer or business.
  • Black Swans caused no measurable flight to safety of bonds.
  • Despite the theories that the U.S. currency will lose its global position, during the
  • Black Swan many investors still sought the safety of the U.S. dollar.
  • Companies are well positioned with high levels of cash and low debt allowing them to increase dividends, buy back shares and enter into the merger and acquisition market.
  • In spite of the S&P 500 enduring 7 corrections of 5% or more during this bull market which began March 9, 2009, the U.S. economy and the market continues to demonstrate signs of strength. This is the greatest number of 5% corrections in the first 25 months of a bull market in the past 70 years according to InvesTech Research.
  • Gold, agricultural commodities and oil continue to rise. Challenging at best to determine if the increase in commodity prices is caused by traditional supply and demand or if the impact of speculators is driving prices higher.

We will continue to fault on the side of caution and allow the market and the economy to continue its recovery as it slowly regains its health with the unusual level of volatility.