Marching On

Setting aside the brief crisis created by Cyprus and quickly addressed by the European Community, the markets performed admirably in March with the Standard and Poor’s 500 Index (S&P 500) all-time closing high once more a possibility. Improvements in home prices and in the manufacturing sector continue to drive market optimism. Here is what some of the leading commentators are saying:

• Many individual investors are ignoring global issues – for the time being – but the possibility of further Eurozone problems may begin to drag on the markets. Some experts acknowledge that while the Cyprus crisis might be over, we should expect more of the same – and the next problem most likely will be more interesting.
• Other experts note a major shift in investor sentiment. They also observe that the past few months demonstrate a reverse type of market timing. Investors who dumped stocks, taking losses in 2007, began putting major amounts of money back into the U.S. markets in January – after the big market rallies and all-time highs had occurred (i.e. they missed the major gains). The pros urge returning investors to learn from the past cycle, recognize they missed the big gains this go-around, and be prepared to stay in for the long haul.
• Over the past three years, bonds have underperformed stocks over four different periods. Some insiders believe data models indicate a rebound in the bond market could be on the horizon. However, if bond resurgence doesn’t happen, the bull market’s continuing charge may embrace emerging markets.
• Many analysts see the influence of the Federal Bank’s policies – the intervention commonly referred to as quantitative easing – as continuing to cancel out risk assessments that would (in all likelihood) be more negative without it.

Federal Reserve

As indicated above, monetary policy has a major impact on the markets. Investment experts watch the Fed’s policy briefings carefully. The March policy address by New York Federal Reserve Bank President William Dudley hit on the usual key points, but brokers would have preferred more definitive answers. Here’s a brief synopsis:

• Federal Reserve Chairman Ben Bernanke suggested that the Fed will taper off the pace of asset purchases when it sees “lasting improvement in range of key labor market indicators.” The Fed has not said what it would cut back on – currently the Fed is purchasing $40 billion of mortgage backed securities and $45 billion of Treasuries each month. We also don’t know if the Fed would purchase reduced quantities of both; just one category first; or if there is a projected date when this might happen.
• The indicators the Fed reviews include: unemployment rates, payroll employment, the hiring rate, layoffs, total job separations, and spending and economic growth. In order to stop asset purchases entirely, the Fed would have to see substantial improvement in the labor market. Clearly the desired improvement has not been met yet, but we really don’t know the Fed’s criteria.
• A revamp of the Fed’s exit plan has been promised. No deadline has been given, but financial experts and economists are hoping that minutes of the Fed meeting (to be released April 10, 2013) will have some answers.

As March goes out on a note of optimism, investors look forward to a spring of renewed growth.

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