First Quarter 2012

Finally! The positive streak of economic news which began mid-December of last year, has continued, and seems to be propelling stock market returns up. Since the beginning of the year, domestic growth stocks outperformed domestic value by several percent. Both large- and small-cap growth are at 12%, while their value counterparts are at 9%-10%. Foreign stock returns have been similar, while diversified emerging markets came in with the highest returns at almost 15%. Global real estate returns were nearly double domestic real estate at 13%.

With the exception of long-term government bonds, bond returns continued to be positive and in the low single digits. Riskier bonds, such as high yield and emerging market, returned 5% and 7% respectively.

Where is the U.S. economy headed next now that the DOW is a notch below 13,000? According to Dr. Jerry Webman, Chief Economist for Oppenheimer Funds, now that stocks have made significant gains over the past three months, some churn in the short run is certainly possible, but any pullback would likely represent a buying opportunity as there is little to suggest that we're done with the current cyclical rally yet.

Overall, the economic news remains supportive, as it largely has been for several months now. Much of the new data released last week was encouraging, with pending home sales rising, consumer confidence up sharply in February, and weekly jobless claims down once again. Of all the leading economic indicators, few provide a more timely and accurate assessment than the weekly jobless claims, which have declined steadily in recent months. Consumers saw their incomes grow modestly in January and spent at a faster rate than in the previous month. Somewhat surprisingly, however, despite a slew of strong regional manufacturing surveys, the national-level ISM Purchasing Managers Index showed a slowing rate of expansion—but still expansion—in the manufacturing sector.

While the U.S. appears on track for continued modest economic expansion, that growth is still tepid enough to leave the economy—and the financial markets—quite vulnerable to shocks. Among the biggest potential sources of trouble on the horizon is, of course, the soaring price of oil. $4.00 gasoline could prove problematic to the recovery. Already the national average price of gasoline has risen from $3.28/gallon at the start of 2012 to $3.73/gallon at the end of last week, and market analysts predict $4.00/gallon or more in the weeks ahead. Also the risk of a shock from across the Atlantic appears to be receding, though the Eurozone periphery's debt woes are by no means solved.