|Apr-08||Y-T-D||1 Year||3 Year||5 Year|
|MSCI Emerging Markets||8.12%||-3.77%||25.37%||33.85%||35.34%|
|Lehman Muni Bond||1.17%||0.55%||2.79%||3.57%||4.03%|
|ML High Yield||4.17%||1.00%||-0.83%||6.73%||8.23%|
|SSB Global Bonds||-3.24%||6.11%||15.13%||5.57%||7.17%|
The Government’s preliminary estimate of first quarter Gross Domestic Product (GDP) indicated that the economy grew 0.6%, which was equal to that of the fourth quarter last year. Most of the positive economic effects came from the buildup of domestic inventories, as well as the continued rise in exports due to the fall in the U.S. dollar (making U.S. goods relatively cheap). With the easing of interest rates and unprecedented injection of liquidity into the markets on the part of the Federal Reserve, it remains to be seen how much inflation will rise in the coming months.
After one of the worst first quarters in recent memory, equity markets around the globe bounced back in April. U.S. mid cap stocks rallied, 7.7%, while large and small cap stocks each put up better than 4% for the month. Since the Federal Reserve’s emergency rate cut on January 21, 2008, the S&P 500 returned 8.5% through May 2. Most of the rally in the U.S. can be attributed to the fact that corporate earnings are still fairly strong (outside of financials) and to many investors’ belief that we are starting to see the beginning of the end of the credit crisis that began almost a year ago. Overseas markets also put up strong numbers in both developed and developing markets. The MSCI EAFE returned 5.4% and the MSCI Emerging Markets returned 8.1%.
The Fed cut interest rates for an eighth consecutive time on April 30, putting the Fed Funds rate at 2.0%. However, they indicated in their minutes that they are likely to pause at the next meeting as they again turn their attention to inflation. In a reversal from the first three months of the year, investors began to sell out of Treasuries, opting to buy both high yield bonds and municipals, whose yields have once again become more attractive on a risk-adjusted basis. In other words, investors are starting to invest in credit again, something that hasn’t happened for about the past nine months.
Commodities had another strong month, gaining more than 3.5%. Crude oil prices continued to surge, surpassing the $118/barrel mark late in the month (current prices stand around $120/barrel). Gold, which has seen a gigantic run-up in the last year, fell precipitously in April, down 8% as speculators took profits. Despite the increase in oil and the sell-off in gold, the big concern going forward is agricultural commodities. Speculators have driven up the price of many grains, causing Southeast Asian, African, and some South American countries to stop exporting in fear of not being able feed their own people. An interesting side note is that Costco began to limit the amount of rice that members can buy.
Although the residential real estate market continued to have its problems, commercial real-estate has bounced back nicely from a dismal 2007. Lower interest rates have again allowed investors to finance new property acquisitions and to redevelop existing properties at favorable rates. This improved financing environment has resulted in strong returns for that part of the economy, with the Dow Jones REIT index up 6.1% in April alone and up 8.4% year-to-date.
Looking ahead, it remains to be seen if the federal tax rebate checks, which started to go out at the end of April, will provide a boost to the economy. With housing prices continuing to slide, there is great debate as to whether consumers will spend their rebates on goods and services or pay down the enormous debts that many have incurred. As homes can no longer be used as ATMs due to the decline in values, it is the government’s hope that the checks act as an economic stimulus. Of even greater concern down the road are taxes and unemployment. It is likely that many of the Bush tax cuts that were enacted a few years ago will expire in 2009 and 2010 -- no matter who wins the presidency. As a result, taxes on capital gains and dividends are expected to increase, which would dampen the likelihood of higher future investment, and more importantly, growth in the economy. Coupled with higher expected inflation (due to the rise in commodity prices) and the massive injection of liquidity into the markets over the past year, the outlook for a quick recovery remains in question. Unemployment may also begin to tick up as a result of a slower economy. With inventories building up and commodity prices continuing to rise, companies will have to cut back somewhere, and that usually means expensive human capital, which directly impacts profitability. Despite all of these factors, it is possible that we will be pleasantly surprised by an economy rebounding more quickly than expected and inflation remaining in check. Stay tuned...
Director of Research