|
|
 |
       |
   |
|
 |
February 2, 2010 |
 |
|
||||
|
The New Year started off with a bang in the equity markets as the S&P 500 Index raced out to a 3.2% gain in the first part of
the month, setting a recovery high of 1,150 on January 19. However, since then the S&P has experienced a 6.6% correction
despite a very positive Gross Domestic Product (GDP) report on the last day of the month. For all of January, the S&P 500
ended with a loss of 3.6%. International markets fared a bit worse with the MSCI EAFE Index declining 4.4% in January.
More Signs of Economic Recovery In the letter that accompanied your October statements, we mentioned that third-quarter growth in GDP registered as positive for the first time in over a year, suggesting that the economy was once again growing and in recovery mode. However, we offered that piece of good news with one caveat: “While the (third-quarter) data seems to confirm that the economy has not only stopped slowing but started growing again, one-time and/or short-term stimulus efforts like Cash-for-Clunkers and the First-Time Home Buyer Tax Credit certainly helped to boost the economic activity. As a result, the GDP figures over the next few quarters will be very important in determining how sustainable the economy’s recovery is without as much stimulus from the government.” The fourth-quarter GDP figure, released on January 29, helped to ease that concern. Not only was the annualized rate of growth high and ahead of economists’ expectations—5.7% vs. 4.5%—but the fact that government spending was actually a drag on the growth figure was encouraging as well. The biggest contributor to growth in the fourth quarter was an increase in business inventories, which is a positive sign that businesses now have enough confidence and visibility to begin restocking their low-level inventories. Improvement in business spending is also a reason that we have been overallocating to the technology sector, as IT spending should increase as a result. Going forward, the economy is expected to continue to grow in 2010, but it is unlikely to persist at the fast-paced rate of the fourth quarter. Economists expect about 2% to 3% growth for the year on average. Improving Economy Translating to Improving Earnings The recovering economy is reflected in the positive fourth-quarter earnings reports that began in mid-January. While it is still early, with less than half of S&P 500 companies reporting, the revenue results are the most encouraging. Earnings began improving in early 2009, but much of the earnings improvement came from severe cost cutting. From the letter that accompanied your July statements: “(Second quarter) sales figures were not as impressive as earnings, suggesting that companies were beating expectations by cutting costs rather than seeing their customers open their wallets more widely. The improvement in earnings was a positive development, but cost cutting cannot go on forever, so at some point consumers and businesses will need to start spending more if the earnings reports are to transition from ‘less bad’ to good.” So, it is a positive development that 77% of the S&P 500 companies reporting so far beat sales estimates in the fourth quarter. January Activity As a result of our investment committee meeting in January, we made only one major change, selling PIMCO All Asset Fund (PAAIX/PASDX) in Class 4. As its name suggests, the fund invests across asset markets, varying its allocations to each asset class based on market and economic conditions. But with just 5% of the fund allocated to equities and the vast majority invested in bonds, we felt that the fund was no longer in line with our view of current market conditions, which we feel call for a more aggressive, equity-oriented allocation.
|
||||||||
| ACTIVE PORTFOLIO ENHANCEMENT |
| A Higher Standard |
| Adding Value |
| Proxy Voting Policies & Procedures |
| Privacy Policy |
