First we have to highlight the outstanding return (USD based) on equities in the first quarter of 2012!

12.6% for the S&P 500 Index
11.0% for the MSCI EAFE Index
14.1% for the MSCI Emerging Markets Index

Informed investors knew the markets were long overdue to rise based upon the fundamentals, but what’s next? Of course there is room to grow based on earnings but the short-term forecast is murky at best until after the Presidential election.

A recent presentation from JPMorgan highlighted some risks shown in the next few pages that include: U.S. federal finances, actions of the Federal Reserve, volatility in emerging markets, and the impact an oil crisis would have on U.S. GDP. However, we still face headwinds that are a carryover from 2011 including: Declining home values, European sovereign debt crisis morphing into a European banking crisis, and anemic employment growth.

We are still of the opinion that the Supreme Court’s decision regarding the constitutionality of the healthcare insurance mandate at the end of this quarter will have a significant impact on the market followed by the Presidential election in the fourth quarter. Corporations are still hesitant to deploy the $2 trillion in cash sitting on their balance sheets so they’ve started paying higher dividends. The chief investment strategist from The Hartford recently theorized that dividends will continue to increase even as earnings growth levels off since Board members typically receive a monetary benefit from increasing dividends and, in the current low bond yield environment, investors will welcome higher yields on stocks that have a higher potential for capital appreciation than bonds.

Although the remainder of 2012 doesn’t show much promise for a continuation of the first quarter’s market performance it is sure to include several cable news event gems. Commentators will be busy reviewing every possible outcome and ramification as we await the release of the Supreme Court decision on June 30th followed by our Congressional leaders making the most of the unfolding drama as we hit our debt ceiling in October. However, both of those events and the Olympics in London will be eclipsed by the nail biting moments on November 6th as the votes for our next President are tallied.

All in all, the remainder of the year will probably be as exciting for cable news junkies as it is frustrating for investors as they sit on the sidelines trying to interpret the tea leaves under a cloud of uncertainty. Let’s just hope that we avoid an oil crisis or natural disaster that truly saps the potential 2-3% growth in the GDP forecasted for 2012. If we can begin the fourth quarter in the same shape as we started the year we may even be able to convince nervous investors to step out of their cash investments making 0.02% and into a market that has already returned 122% since it’s low in March of 2009.

If you have questions or comments, please contact Michele Suriano at 303-725-7086.

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