Q1-12 Update

The S&P 500 was up over 12% in the first quarter of 2012. The best first quarter in 14 years was accompanied by very little volatility. No single session changes were greater than 2% (there were 14 in the fourth quarter of 2011). Perhaps the most pertinent development was that the Euro zone did not compound its financial crisis. The European Central Bank has provided enough of a financial backstop for now.

Corporate earnings continue to grow slowly to support the stock market’s fundamental valuation. 2012 profits from the S&P 500 companies are forecast to exceed $105. The growth rate is slowing but seems to be stable and we can assign a reasonable valuation to the stock market.

Gross domestic product growth was 3.0% in the fourth quarter of 2011 (data released 03/29/2012). Most projections for 2012 call for low growth at 2.5%. The Index of Leading Economic Indicators (which includes car sales, housing starts, bank lending, and personal income) rose for the fifth straight month in February indicating the American consumer continues to spur activity.

Commodities (measured by Dow Jones-UBS commodity index) fell 2% in the first quarter. Both crude oil and gold were up. Natural gas plunged almost 30% as a supply glut coincided with a mild winter.

The housing sector is holding and although there is not likely to be a rapid improvement there are some more encouraging signs. February existing home sales were up 8.8% over a year ago. Forward-looking building permits rose 5.1%.

The unemployment rate was 8.2% according to the March jobs report. Job formation continues at a decent rate with over 600,000 jobs added in the first quarter.

The Federal Reserve held short term interest rates near 0%. The Fed continued to predict near zero interest rates through late 2014. They did upgrade their outlook of the economy slightly. The yield on the 10-year Treasury note finished the quarter slightly higher at 2.2%. Fixed income alternatives continue to offer low yields with little chance of price appreciation.

Inflation remains low. February’s core consumer price index (released 03/16/12) was up 2.2%. Employment and deficits may play a prominent role in the future.

Stocks were up all over the world. Developed markets were up about 11% and emerging-markets shares gained 13%.

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

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