Q1 2011 Newsletter

This past quarter has not been short on big stories.  The continuing issues in Japan and in the Middle East make one pause and reflect.  Damage to life and the economy is terrible in these areas.  In addition, in response to continual radiation leaks and the potential reduction in oil production, the world markets have shown their unease in the aftermath of these events.  While being sensitive to the suffering, especially in Japan, we do not believe these events will unfold into unmanageable world economic problems.  In fact, the stage could be set for additional economic expansion as Japan begins to rebuild.

In this quarter another big story came with much less coverage.  The European Central Bank (ECB) decided to raise interest rates for the first time in two years while the United States and the Bank of England decided not to do so yet.  The latter two don’t see “core inflation”, which excludes energy and food, as being a problem.  We will see if the move from the ECB will cause the others to change their stance.  As a side note, the most fearful thing about transitioning from a stance of monetary easing to one of interest rate hikes is the fear of the transition itself.  As long as credit markets remain open, growth may slow a bit but should resume an upward trend.

On the domestic front, it was reported that the U.S. economy improved in every region of the country in the first quarter.  We continue to see

increased manufacturing, higher consumption and increased hiring in all twelve regions as surveyed by the Federal Reserve.  In addition, the number of job openings being advertised continues to rise, suggesting that trend will continue.  Higher oil prices may dampen some of this growth in the near-term.  In the long-term however, absent much higher and sustained oil prices, we believe the economy will continue to grow.

The big story for this quarter is the end of the Fed’s Quantitative Easing program known as QE2.  It marks the end of a historically accommodative period.  Eventually the Fed will have to increase interest rates; however, consensus opinion is that this won’t happen before the end of the year.  Yet the general bull market we have had in quality bonds over the past 30 years is likely over.

All in all, we see the economy continuing to strengthen – not without its challenges.  We expect good earnings reports in April for the first quarter.  We also expect to see economic measures continuing to show positive momentum.  The deflation scare that had been present in the past is now given little attention.  In fact, we can see the stage being set for continuing world economic growth.  We continue to make adjustments to the portfolios to take advantage of this environment.

If you would like to discuss any of these areas in more detail please feel free to call us.

Best Regards,
Marc Henn CFP ®, President