Key Economic Indicators
In financial parlance, there is a “risk-on” trade and a “risk-off” trade. The first quarter of 2012 was clearly a “risk-on” environment. Improving corporate fundamentals and clarity in the Eurozone financial crisis offset the increases in geopolitical tension around Iran and fuel costs. The March 2012 inflation numbers (base Consumer Price Index = +0.2%; with food & energy = +0.4%) imply the spike in gasoline prices since December is having a cost-push effect on overall prices. Still, trailing 12 month inflation is normal at 2.7%. Unemployment improved from hiring and work force dropouts, dropping to 8.3% by February 2012. Consumer and business confidence, measured from several indices, hit 12 month highs
The Equity Market, the quintessential “risk-on” trade, outperformed other asset classes. “Growth” stocks, reflecting optimism in future returns, trumped the relative stability of “value” stocks earning streams. With the additional clarity on the Eurozone bailouts for Greece, international developed markets were able to participate in some of the optimism, although not to the extent of US or Emerging Markets.
The index performance values (below) are for the 1st quarter of 2012.
- Large Cap Growth - Russell 1000 Growth: +14.69%
- Large Cap Value - Russell 1000 Value: +11.12%
- Small Cap Growth - Russell 2000 Growth: +13.28%
- Small Cap Value - Russell 2000 Value: +11.59%
- Developed International Markets - MSCI EAFE: +10.86%
- Emerging Markets - MSCI EM: +14.07%
Bond returns were, collectively, flat. The diminished risks to corporate credit (and High Yields) reflected the possibility of improving fundamentals in the economy. However, this improvement increases the chances of inflationary pressure, prompting increases in interest rates and weakness in government backed paper – particularly of the longest duration.
- Barclays Aggregate Bond: +0.30%
- Bank of America/Merrill Lynch High Yield: +5.15%
- Barclays Capital US Intermediate Credit: +2.50%
- Barclays Capital US Government: -1.12%
- Barclays Capital US Gov’t/Credit Long Duration: -2.12%
The alternative marketplace roiled. Increased economic activity generally boosts commodity prices, and we’ve already noted recent highs in oil and gasoline. However, commodities received downside pressure from a glut of cheap natural gas and unseasonably warm weather (increasing supply of key crops & decreasing demand for energy). Hedge fund data for March is not yet available, but was trading directionally positive through February.
- Real Estate - FTSE NAREIT All REIT: +10.41%
- Commodities - DJ UBS Commodities: +0.89%
- Inflation – Barclays US TIPS: +0.86%
- Hedge Funds – DJ Credit Suisse Hedge Fund: +1.61% (YTD through February 2012)