Q1-11 Update

The S&P 500 was up 5.4% in the first quarter. Despite political turmoil in North Africa and the Middle East and the devastating earthquake and nuclear crises in Japan, the US equity markets managed to move up again.

Corporate earnings have been strong. Companies have been able to steadily improve profits since the lows of 2008. Operating earnings on the S&P 500 were about $85 for calendar 2010. Some estimates for 2011 are at nearly $100. At that level we can still assign a reasonable valuation to the stock market. Earnings growth is becoming more challenging though. Expectations are higher and there is less potential for upside surprises.

Gross domestic product growth was 3.1% in the fourth quarter. 2011 is expected to show low growth.

Commodities were up 4.4% in the first quarter. Crude oil was up 16% to over $100 per barrel amid worries that disruption would spread to Saudi Arabia. Gold was up about 1.3% to $1,438.90 per ounce.

The housing sector shows little sign of improvement. April existing home sales fell 9.6%. New home sales fell 16.9% to a record low. Building permits are at the lowest levels in 40 years.

The unemployment rate declined to 8.8% according to the March jobs report. 216,000 jobs were added in the 6thstraight month of gains.

The Federal Reserve held short term interest rates near 0%. The interest rate on 10-year Treasury bonds rose to 3.45% during the quarter. Quantitative Easing 2 by the Fed is scheduled to end in June. By then they will have purchased $600 billion in Treasury debt. The steady flow of cheap money has played a role in the fueling the stock market gains. Fixed income alternatives offer low yields with little chance of price appreciation.

Core consumer prices officially rose very slowly. February’s reading of core items was up 1.1%. Though there is very little inflation, continued large deficits and the creation of dollars may play a prominent role in the future.

Equities all over the world also moved higher in the first quarter. Performance was mixed with Europe flat and Japan was down 4.6%.

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