Balmy Market Weather

In percentage terms, the first quarter of 2011 provided the best gains for U.S. stocks in more than a decade--the best quarter since 1999. We experienced positive--albeit modest--returns across almost the entire spectrum of investments for the first three months of the year.

The Wilshire 5000, which is a proxy for all the stocks in the U.S. market, gained 6.27% for the quarter, and has been up 17.43 over the past 12 months. The comparable Russell 3000 rose 6.38% in the first three months of the year.

Large cap stocks provided single-digit gains, with the widely-followed S&P 500 up 5.42% in the first quarter, 5.92% on a total return (including dividends) basis. Every component sector showed gains, ranging from a 16.29% rise in energy stocks to a 1.62% return in utilities. Industrials were up 8.2% and health care rose 4.99%. Meanwhile, the Wilshire U.S. large cap index was up 6.06% for the first three months of the year, while the Russell 1000 large cap index rose 6.24%.

The Wilshire U.S. Mid-Cap index gained 9.21% for the first quarter; the Russell Midcap was up 7.63% and the S&P 400 posted a 9.02% gain; up 9.36% on a total return basis.

The Wilshire U.S. Small Cap 250 index rose 10.06% in the first quarter, while the broader-based Russell 2000 small cap index was up 7.94%. The S&P Small Cap 600 rose 7.43% for the quarter, up 7.71% on a total return basis.

The widely-followed NASDAQ Composite Index finished the quarter up 4.83%, close to its 10-year average of 4.22% a year.

International stocks gained modestly as well. The broad Europe, Australia and Far East (EAFE) index was up 2.67% for the first three months of the year. The European component of the index rose 5.88% despite continuing worries about sovereign debt issues in Greece, Ireland, Portugal and Spain. In contrast, Pacific region stocks were down 2.96%, largely because of a drop in the Nikkei stock market.

Bond rates continue at historic lows. According to Bloomberg, 3-Month Treasuries yield just 0.09%, while 12-Month T-Bonds are yielding just 0.27%. Five-Year bonds yield 2.28%, 10-Year issues yield 3.47% and 30-Year bonds offer 4.50% interest. Bloomberg lists composite yields on 2-Year Municipal Bonds at 0.63%, while 30-year Munis offer 4.82% interest.

In real estate, the Wilshire REIT index rose 5.84% in the first three months of the year. The S&P U.S. REIT index was up 5.49%; up 6.39% on a total return basis. The S&P Global REIT index, which tracks changes in real estate across developed and emerging markets, rose 4.62% for the quarter.

The balmy economic weather and sunny market returns (in striking contrast to the actual Winter climate experienced in so much of the country) must have been a surprise to the economic "weathermen" who, only last July, were predicting a "bleak" 2011 economy. An Associated Press Economy Survey, gathering the opinions of private, corporate and academic economists published July 29 of last year found a consensus of weaker growth, higher unemployment and generally cloudy skies for the economy. In particular, the economists were expecting job growth to remain weak. As it happens, U.S. private employers added 216,000 jobs in March, and a revised 194,000 in February, reflecting what David Katz, chief investment officer at Matrix Asset Advisors in NY describes a reasonably-paced labor recovery.

Meanwhile, the stock market recovery has highlighted one of the peculiarities of investment math. Prior to March of 2009, the S&P 500 had, in round numbers, fallen 54% since its 2007 peak. The recovery, again in round numbers, has achieved a (quite remarkable) 100% gain since the March 2009 low point. Yet the market has not yet fully recovered to its former heights.  

The recovery...has achieved a (quite remarkable) 100% gain since the March 2009 low point. Yet the market has not yet fully recovered to its former heights. 

The reason, obviously, is that investment math tends to understate losses and overstate gains. After a 20% decline in the your investment portfolio, you need a 25% gain before the portfolio is made whole again. As the declines get bigger, the disparity grows dramatically; a 50% drop requires a 100% gain to repair the damage, and an 80% drop would require 500% subsequent rise before you climbed back to where you started from.

In terms of building wealth, that means that the smoothest ride, everything else being equal, is also the most rewarding, which is why we attend industry conference sessions on how to achieve better diversification in our managed portfolios, which asset classes tend to zig when others zag and what new investment opportunities exist which are less likely to follow the same return patterns as U.S. and international stocks.

Achieving this diversification is not always easy, as evidenced when virtually every asset class fell in lock step during the Great Recession downturn; indeed that was when many investors--including some professionals--learned all over again the value of having a bond and cash cushion in their portfolios. We were fortunate in this first quarter of the year that nearly every one of the traditional asset classes offered positive returns; we do not anticipate that being the case forever. Your investment eggs are in many baskets as a precaution against choppier markets whenever they decide to manifest.

The articles and opinions expressed in this document were gathered from a variety of sources, but are reviewed by LJCooper Wealth Advisors prior to its dissemination. All sources are believed to be reliable but do not constitute specific investment advice. In all cases, please contact your investment professional before making any investment choices. Any articles written by specific LJCooper advisors will include a ‘by line’ indicating the author.