Q4-11 Update

The S&P 500 was up over 11% in the fourth quarter. The index closed at 1,257.60, 0.4 below the close of a year ago. Headlines from around the world caused sharp market swings. Stocks closed up or down 2% or more on 35 days as the world's major developed economies contend with a mountain of debt. Investors fixated on volatile and unpredictable events including geopolitical strife in the oil-producing Mideast; Japan's earthquake, tsunami and nuclear crisis; a debt crisis in Europe; and legislative gridlock in the U.S. The S&P 500 had been up as much as 8.4% in late April and down nearly 13% for the year at its 2011 low in early October.

Corporate earnings continue to show excellent growth. The stock market’s solid fundamentals have been drowned out by other headlines. 2011 profits from the S&P 500 companies will be close to $100 per share. At that level we can assign a reasonable valuation to the stock market. The market's current price-to-earnings ratio is currently about 12.5 times. Earnings growth will likely slow this year but there is no drop-off expected.

Gross domestic product growth was 1.8% in the third quarter of 2011 (data released 12/22/2011). Most projections for 2012 call for low growth at 2%-2.5%.

Commodities (measured by Dow Jones-UBS commodity index) fell 13% in 2011. Crude oil futures edged back up toward $100 in the fourth quarter and finished the year up 8.2% at $98.83. The price of gold soared to a record high north of $1,888 per ounce in August before a late-year selloff took it back down $1,565.80 for a 10% gain on the year.

The housing sector is holding with selling prices about 2% above the March of 2011 lows according to the Standard & Poor’s Case-Shiller 20 city index. Existing home sales are still weak but did rise in November. New starts are still hovering near record lows.

The unemployment rate was 8.5% according to the December jobs report. 200,000 jobs were added in December. Moody’s analytics expects the unemployment rate to continue to move lower but remain above 8% in 2012.

The Federal Reserve held short term interest rates near 0%. The yield on the 10-year Treasury note finished the year at 1.9%, down 1.4 percentage points. U.S. Treasury yields fell broadly in 2011 as investors sought a safe harbor and downgraded expectations for economic growth. Fixed income alternatives offer low yields with little chance of price appreciation.

The U.S. dollar index rose 1.5% in 2011. The dollar was up 3.3% over the euro. The Japanese yen rose more than 5% against the dollar.

November’s core consumer price index was up 2.2%. Inflation remains low. Employment and deficits may play a prominent role in the future.

Worldwide, stocks lost 5.0% the MSCI World Index. Euro-zone markets were down 15.7% and emerging-markets shares lost 18.2%.

Please let us know if you would like additional information on any of the above.

Thanks for your continued confidence.

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