The Markets

With the first quarter now in our rearview mirror, it’s a good time to reflect on the key issues that affected the markets. As you can see in the chart below, the domestic stock market did not fare well over the past three months. However, it is still showing positive returns for the 3-, 5- and 10-year annualized returns.

Turmoil in the Credit Markets
The word “subprime” became firmly entrenched in our lexicon over the past few months as the domino effect of defaulting homeowners rippled through the financial system. Packaged pools of mortgages declined in price and led to billions of dollars of losses for large multi-national banks, investment banks, and hedge funds. Even the normally staid municipal bond market was affected as yields on tax-free municipal bonds rose above the yield of comparable Treasury securities. Prior to the first quarter, that hadn’t happened in decades according to an April 1 Wall Street Journal article. The Federal Reserve Board, in an effort to maintain stability in the economy, lowered a key interest rate by a full two percentage points this past quarter. The Fed also broadly expanded the terms and the types of firms that could borrow from it. All in all, it was an historic quarter for the credit markets and for the actions taken by the Fed.

Bear Stearns Goes Bye Bye
In a classic “run on the bank,” rumors of liquidity problems at investment bank Bear Stearns led to an unprecedented Federal Reserve orchestrated bailout of the firm by J.P. Morgan Chase. The hastily created deal on Sunday, March 16, helped avoid a potential major disruption in the financial markets when the markets opened the next day. The Fed pulled out all the stops on this one and its actions will likely be debated by academicians, politicians, and investors for a long time to come.

Commodity Prices Continued to Roar
Gold prices pierced the $1,000 per ounce mark. Platinum prices broke the $2,000 per ounce level. Crude-oil prices topped $110 per barrel. Natural gas prices rose 35% for the quarter on the New York Mercantile Exchange and wheat futures peaked at more than $9.25 per bushel, all according to the Wall Street Journal. It was somewhat ironic that commodity prices were rising while recession talk in the U.S. was picking up steam. You would think that a slowing U.S. economy would put the brakes on commodity prices. Toward the end of the quarter, commodity prices did moderate to some extent, but bullish forecasters believe continued demand from emerging economies (e.g., China, India, Brazil) and tight supplies may keep us from seeing a lot of air let out of what some folks believe is a commodities bubble.

“SOS” For The Dollar
Dollar weakness continued this past quarter as it slid 7.5% against the Euro, 10.6% against the Yen, 12.4% against the Swiss Franc, and 3.2% against a trade-weighted basked of 26 currencies, according to the Wall Street Journal. A weak dollar makes imports more expensive and makes traveling overseas more expensive, too, for Americans. On the bright side, it makes our exports more competitive and that has helped certain sectors of our economy. Low U.S. interest rates coupled with fears of inflation have helped keep pressure on the dollar. At some point though, that may change. “The dollar is as undervalued against the major currencies as it’s ever been,” according to Robert Sinche, head of foreign-exchange research and strategy at Bank of America Corp, as reported in an April 1 Wall Street Journal article.  Â
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Source: Dow Jones Indexes

The Dow Jones World Index, which excludes U.S. stocks, fell 8.7% in dollar terms in the first quarter, according to the Wall Street Journal. That’s not too far off the 7.6% decline in the Dow Jones Industrial Average. So, when it came to the stock market, there were few places around the world to profitably park your money in the first quarter. While the quarter ended in the red, it started the new quarter on April 1 with a huge rally that saw the Dow Jones Industrial Average rise nearly 400 points. We’ll let you know in three months if that momentum carries through for the rest of the quarter!