The proverb, "March comes in like a lion and goes out like a lamb" usually refers to spring weather, but investors have reason to hope that it proves true for the markets this year. February's track record reminded analysts and investors alike to expect some volatility. The month began with worries over Europe's escalating debts and ended with concerns regarding U.S. healthcare legislation and interest rates. Concerns about the eurozone, heightened by major financial woes in Greece, persisted. Month-end also saw the specter of rising U.S. unemployment casting a long shadow. Significant rays of hope were apparent among the troubling news, and investment professionals reminded us not to overlook important positive news, such as the strength shown in the corporate earnings season.
Here are some of the significant issues that commanded headlines and attention:
- Knee-jerk volatility might persist Weekly jobless claims that exceeded forecasts caused stocks to plummet at month-end, with the Dow Jones Industrial Average dropping 172 points. The markets focused on the bad news and failed to be buoyed by durable goods data that greatly exceeded the expected numbers. Economists urged investors to put this negative news in perspective.
- Anticipate a gradual, sustainable recovery Wall Street observers suggested that investors compare the economy now with the situation a year ago and recall how, this time last year, the bear market was battered by a global financial meltdown. They note that investors saw one of the fastest recoveries within living memory as 2010 opened - a trend that cannot be expected to continue without some ups and downs. Experts concede that economic issues in emerging nations and in the United States will continue to cause concerns but that positive signs abound, including growth in corporate earnings, increased demand for durable goods and a recovery in the manufacturing sector.
- Watch the Federal Reserve How and when the Fed pulls back from its bailout rescue program will have a major impact on the markets. Recently, the Federal Reserve upped discount interest rates (the rate banks pay for borrowing reserves), signaling a move to a more normal banking environment. Despite assurances that consumer credit rates will not increase for an extended time, most analysts believe that higher interest rates are inevitable; the only issue is when. Other questions remain concerning how the Fed intends to disperse the remaining stimulus funds. Only about a third of the $787 billion has been distributed to date.
- Get ready for higher interest rates The markets try to predict major events, and the Federal Reserve's future plan on interest rates is one of the most anticipated. Consult your professional tax and financial advisors to consider how your stock portfolio might be affected by rising interest rates. In brief, analysts see the following possibilities on the horizon:
- Higher interest rates minimizing inflation worries;
- Fixed-income holdings such as bonds losing value;
- A stronger dollar creating a lessening demand for U.S. goods and lower profits for companies booking non-dollar revenue.
Thinking ahead and considering a possible rebalancing strategy makes sense, but Wall Street experts caution against overreacting to negative news. Instead, financial advisors are urging investors to remember that restoring stability to the economy is not an overnight matter.