2012 off to a great start

• The S&P 500 Index was up 4.48 percent while the Dow Jones Industrial Average climbed 3.55 percent.
• Clearly, the risk-on trade has returned; this was the best January market performance since 1997.

Earnings disappointed somewhat

• One-third of S&P 500 companies have reported, but only 59 percent beat estimates, less than the typical 68 percent to 75 percent.
• But overall earnings growth so far for the fourth quarter is 7.9 percent, up from previous levels.
• Companies that are beating estimates are doing so by wider margins.

Equity markets show signs of continued strength

• The S&P 500 remains above its 200-day moving average.
• The 50-day moving average has just crossed above the 200-day as well, a phenomenon known as the "golden cross."

International markets performed even better

• The MSCI EAFE Index was up 5.33 percent in January, and the MSCI Emerging Markets Index gained 11.24 percent.
• Technically, the EAFE remains below its 200-day moving average, but the emerging markets index has recently crossed above.
• Investors may have more confidence in the emerging market space.

Signs of life in the U.S. economy

• The jobs situation showed signs of improvement, with the unemployment rate falling to 8.5 percent and strong gains in payrolls.
• Mild winter weather may have accounted for some of this, but unemployment has clearly plodded downward from its 9.9-percent peak in December 2009.
• A rise in personal income and a reduction in initial jobless claims also implied better times for U.S. workers.
• The manufacturing sector persisted, rebounding off third-quarter weakness, according to data from the Institute for Supply Management.
• New orders and production rose at a faster pace than in the previous month, and anecdotal forecasts were upbeat.
• Housing continued to drag, with home prices down 0.7 percent on a seasonally adjusted basis.
• U.S. gross domestic product (GDP) for the fourth quarter of 2011 was estimated at 2.8 percent, annualized—the best since mid-2010.
• Strong consumer spending on durable goods suggested improving confidence and demand, but a large contribution from inventory purchases could prove transitory.
• GDP reports have tended to be revised downward in recent quarters, so it is unclear whether economic growth was robust or merely marginal.

Fixed income dominated by Fed actions

• Rates remained historically low, supported by the Federal Reserve';s (Fed) announcement that it would keep rates low through 2014.
• Treasuries rallied at month-end, with 10-year yields ending below 2 percent.
• Municipal bonds started the year on a positive note, as investors sought perceived safety at more attractive yields than Treasuries.
• A new factor in this space was the release of economic projections by Fed board members and bank presidents.
• These called for modest growth over the next several years and included a downward adjustment from projections made last November.
• Investors perceived this as a positive, viewing a more conservative Fed outlook as supportive of continued low interest rates.

Europe—the never-ending story

• Negotiations for the Greek bailout continued, with pressure applied to public agencies to share in the pain by taking a haircut on their positions.
• The European Central Bank has refused to do so, and this is a key uncertainty in the resolution process.
• The situation may come to a head in the next several months, as pending refinancing needs may force a decision.
• Some positive news has come from negotiations over standardizing fiscal practices across the European Union.
• This may lead to further German support of debtor countries.
• The situation remains uncertain, however, and substantial risks remain.

A strong start but continued uncertainty

• Although the markets had a strong start and many economic indicators are surprisingly good, uncertainty remains.
• In the U.S., consumer spending is the biggest item to watch, as the December figures were weaker than expected.
• Europe remains a risk, too.
• Nonetheless, the overall signs for the U.S. economy and markets are positive.
• We expect volatility to persist, but our overall expectation is now cautiously optimistic.