As January goes, so goes the market for the balance of the year, some pundits claim. As of this writing the S&P 500 Index is up 2.5% for the month, so is a nice up move in the making for 2011? Maybe, but for the year 2010 the S&P finished with a positive return of 15% even though its January started with a decline of about 3%.
As we look forward to this coming year, there is reason to be optimistic. Corporate earnings are still coming in above projections, businesses are putting their cash to work upgrading technology, and most importantly plans for hiring are up. While it will take more than a good past quarter in the equity markets to declare this a new trend, the picture is brightening.
In the State of the Union address by the President, he made it clear that the administration’s policy going forward will be to provide small businesses the tools they need to be innovative, grow and create jobs. Hopefully Congress will work together with the same goals in mind.
What we know by experience though, is that markets do not go up uninterrupted forever. Since September, equities have made an almost unprecedented run to current levels with very few retreats. Last week was the first losing week for the S&P in the past eight weeks, and recorded the first 90% down volume day since November. Add to this the fact that recent trading has been very thin with a few large stocks disguising weakness in the overall markets. Small and Mid-Cap stocks which have led the run up have been the weakest sectors lately.
Current market actions do not necessarily mean we are heading for another major correction. Stock valuations are reasonable and for the reasons described above, the economy should continue to strengthen and bring consumer confidence with it. In the near term, we very well could see some profit taking from the past quarter’s run. Technical measurements are showing an overbought condition in the smaller cap issues and we may see a rotation from those sectors into the larger cap stocks going forward. We do not anticipate any decline to derail the longer term uptrend that we think we are in, so selloffs may provide buying opportunities. With this in mind, money that is currently in cash or money markets waiting to be allocated to equities is being held for this possible buying opportunity.
On a continuing note, we have had numerous inquiries about Municipal Bonds and defaults by cities and states. While there is currently increased risk due to the state of the government’s budgets, municipal bankruptcies have been very rare historically, even in past trying times for issuers. Municipal positions in the fixed income funds we use are very limited. The dozen or so bond managers we use report exposure of between 0% and 3.9% in municipal bonds in their portfolios. We use bond funds for safety and choose those with short durations and high ratings.
Bank CD’s have been another haven for those risk-averse savers. Interest rates have been miniscule and after taxes are paid on that income, earn basically nothing. Being near the start of an upward trend in interest rates, it doesn’t make sense to lock into longer CD rates if those rates will be surpassed before the CD matures. One alternative that allows a higher yield, while remaining relatively liquid, are Ultra Short-Term bond mutual funds. Holding issues with an average seven day duration and a 99% AAA rating, these funds offer substantially higher yields than short-term CDs. The Ultra Short-Term funds have averaged about 3% annually for the past five years. These may be an option for short-term money that needs to remain relatively liquid.
We hope these comments help keep you updated on the current trends and plan to offer them monthly or more often as conditions dictate. Feel free to contact us with topics you would like to see us address in future publications. Please direct your friends or colleagues that may have an interest in these comments to our website.