CIO Commentary: Q1 2012

May 9, 2012

It certainly is a more optimistic time in the financial markets. Good news certainly is easier to deliver! All in all, we appreciate the opportunity to provide ongoing updates, in order to provide you with our latest thinking in our stewardship of the funds you have entrusted to us.

For the first three months of 2012, equity markets globally are up in the 12% range, with emerging markets equities leading the way with a 14% return. In the Equity Fund and in equity portions of our Balanced Funds, we have participated fully in these returns. Certainly optimism (bullishness) has returned quickly.
Consider this: since the September 30, 2011 low, the U.S. equity market as represented by the S&P 500 has appreciated over 20%, following a 17% decline from May-September 2011. Investors have again focused on the long-term potential of stocks around the globe, which by many measures were inexpensive relative to their own history and compared to many fixed-income alternatives such as U.S. Treasuries, which were actually down for the first three months of 2012 (although the Fixed Income Fund was up due to its exposure to U.S. Corporate Bonds). What an amazing turn of events and sentiment!

The question is, is the optimism sustainable? For markets, confidence in domestic growth and greater trust that Europe can address its debt problems has surfaced. In both the U.S. and Europe, central banks have provided massive liquidity and stand ready to provide more, but we know it will not last forever. Earnings, especially in the U.S., have been strong but the level of upside surprises has begun to level off. Although we have taken some money off the table in equities in balanced funds, we still favor stocks over bonds. As Ned Davis, a strategist we follow closely, says, “At extremes in the market, the crowd is almost always wrong.” But during the move or trend the crowd can be right for a while. We will continue to closely monitor how 2012 may be different than the prior two years, where equities started strong but had their challenges as the year went on.

One observation we would make is that leadership matters, and can be infectious. As a result of a few such as Mario Monti (Prime Minister of Italy), Mario Draghi (President of the European Central Bank), and others in Europe, confidence has returned, and investors are willing to take on a bit more risk, as opposed to flocking to ‘safe haven’ but low return assets. Hopefully, political leaders in the U.S. (Congress) tune in and get inspired. Confidence, competence, and leadership are definitely not the only things (as developed economies still have structural problems to work through), but they certainly matter to financial markets.

We will continue to keep you closely informed as 2012 progresses!

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