Looking Beyond the Trees
The wild ride continues. Just like 2010, the first quarter of 2011 was full of nerve rattling events from natural disasters, Middle East riots, and sovereign debt crisis to record deficits, higher oil prices and prolonged unemployment. Despite these events the stock market registered its best first quarter since 1999, up just under 6%. Even the month of March ended slightly positive, despite losing 5.5% over a ten day period early in the month.
Back in late December I suggested that the economic and fundamental backdrop was strengthening and would benefit stock market performance. The markets first quarter return reflected this, as company earnings and improved U.S. consumer confidence and spending trumped global turbulence. Equity only clients of Shapiro Asset were rewarded as their portfolios were position for the improvement and did even better.
Overall I see the U.S. market poised for further gains. The economic backdrop, positive earnings growth, a revamped consumer, improves unemployment data, and tremendous liquidity will provide the strength. Household liquidity is over $7 trillion, commercial banks have more than $1.3 trillion in cash and corporate cash is at historic levels. In addition, Treasury bond yields have resumed rising in the past several days, so Treasury bond prices are falling, causing more money to flee bonds and pour into stocks. This dam of liquidity should fuel the next leg up as demand for risk assets increase.
Shapiro Asset continues to apply its value focus on companies generating free cash flow with a strong balance sheet, thus positioning the portfolio to participate in the markets’ upside potential while providing some downside protection. Security selection going forward will be slightly more defensive, with a slight emphasis on dividend paying securities to mitigate some risk.
For our fixed income portfolios, I continue to maintain a short average maturity of about 2 to 2.5 years which minimizes the interest rate risk implicit in bonds and allows us to hold our positions to maturity.
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