It is officially spring and we should all be emerging from our comfortable hibernation and blinking our eyes as we step into the warm sunshine. With the U.S. stock market gaining ground during winter’s darkness, it would seem that all is well in fair Marketland. With the S&P 500 up 12% in the first quarter and up nearly 20% from last fall’s low point, all (mostly) quiet on the Western (European) Front, and the market apparently ignoring the structural problems in the U.S. and a slowdown in China for the time being, it looked like many investors had taken on some appetite for risk and jumped on board for the ride.
But that was last week and things have changed. The yields on Spanish and Italian bonds have risen considerably in the last week and the U.S. stock market is down a full 4% since last Monday. Nevertheless, trading volume continues to be surprisingly low. And while money flows out of stock mutual funds, as it has every year for the last five years (including the first three months of this year), Exchange Traded Funds (ETFs) have been growing rapidly, perhaps picking up where traditional mutual funds left off as the next best way to get instant diversification for a reasonable cost. In an interesting and somewhat confounding twist, the bond market continued to see inflows last quarter, even as the stock market rallied and as bond yields remained at historic lows.
With the market having gained considerably over the last six months, the U.S. stock market seemed ripe for a pullback. Now, with European debt problems starting to resurface, along with the realization that the global economy is still anemic, investors likely figured it was time for a breather. Add the fact that companies are just starting to report 1st quarter earnings to the mix, and this current correction may be slight or substantial, depending upon earnings results.
As the near-term problems get worked out, we continue to face larger structural challenges at home and abroad (not to mention those related to the global environment). Regardless, I do believe these issues will be resolved. It will be painful at times as solutions to our deep-rooted problems are developed and implemented, but in the long run, we will succeed in moving beyond the messes we’ve created for ourselves and emerge with a stronger, more stable system.
In the meantime, for those who have a longer view on their market-based investments, technological growth across the spectrum both in the U.S. and abroad seems a likely opportunity, however volatile it may be. And while emerging markets are also traditionally volatile, they too may offer some room for growth as their citizens move into the ranks of the global middle class. In addition, society continues to reinvent itself, which will certainly lead to possibilities that have previously not been achievable or even imagined. And always, I believe those companies that are paying attention to their internal operations, addressing the long-term concerns of their employees and their customers, and reducing the environmental impact of their businesses will present less risk to their investors over the years to come.
In all, I continue to emphasize a long-term perspective on the capital markets as they are an ever-evolving animal that will eventually outgrow its awkward, self-absorbed adolescence. In that context, working to develop and implement a reasonable plan that incorporates a comprehensive approach to understanding and building wealth is the best we can do. As Yogi Berra put it, “If you don’t know where you’re going, you might wind up somewhere else.”
The markets are simply a tool to be used wisely to help build our dreams. Luckily, our lives are not solely dependent upon the capital markets – we have other, perhaps less fickle, tools at our disposal that may be more directly tied to our personal and community well-being.
For a much more detailed examination of the markets I would suggest, among other resources, Bill Gross’ April Newsletter: http://www.pimco.com/EN/insights/pages/the-great-escape-april-2012.aspx
Of course I encourage and welcome any questions or feedback.
All the best and happy spring,
Bill