Front Range Financial Consulting

While the value of crossing market “barriers” may be more psychological than real, investors generally cheered as the Dow Jones Industrial Average (an unmanaged index of 30 widely held stocks) edged toward the 11,000 mark when the first quarter of 2010 ended. It seemed a long 18 months since the Dow last finished above 11,000 in September 2008.

As it finished an upbeat quarter, the Dow fell slightly but nevertheless closed at 10,856.63, up 4.1% from its 2009 close. The NASDAQ Composite (an unmanaged index of all common stocks listed on the NASDAQ National Stock Market) rose to 2,397.15, for a gain of 5.7% for the quarter. The S&P 500 (an unmanaged index of 500 widely held stocks) finished the quarter at 1,169.43, up 4.9% for the quarter.

Despite a worrying pullback in late January and early February, the indices moved slowly upward. Some analysts were quick to warn that both global and domestic recovery remains in the slow lane. Market observers note that a positive first quarter doesn’t necessarily point to how the year will play out. Historically, strong first quarters appear to have little correlation with market performance during the rest of the year.

While investors’ portfolios may have shown progress during the last three months, economic doubts lurked in the shadows. Economists were surprised by a decline of 23,000 in the private sector nonfarm payroll reported by ADP for March. A gain of 40,000 had been expected. On the other hand, U.S. consumer spending rose 0.3% in February following a 0.2% rise in January, according to the Commerce Department. Spending rose faster than after-tax income, however, and the personal savings rate fell to 3.1% of disposable income, down from 4.2% in December.

Figures showed that the U.S. economy grew at its fastest pace in six years during the final three months of 2009, with gross domestic product (GDP) increasing at a 5.6% annualized pace during the fourth quarter. For 2009 in total, GDP fell 2.4%. And although the fed funds rate remained at between zero and 0.25%, the Federal Reserve did raise the discount rate that banks must pay for emergency loans from 0.5% to 0.75%. It also closed most of the special liquidity facilities it created to support the markets during the worst of the credit crisis – the only one of those facilities left is due to close June 30. Both were read as optimistic signs that the Fed calculates that the economy is in a recovery stage.

Unemployment, housing market weaknesses and Greece’s debt troubles roiled the markets for short periods during the quarter as well, but investors seemed pleased that there wasn’t a steady beat of bad news. Even the biggest – or at least the loudest – political issue of the past few months, healthcare reform, seems to have been taken in stride by the markets.

Investors have been re-entering the market, as indicated by mutual fund and exchange-traded fund inflows over the past several weeks. This could be a good time for you to check your portfolio’s asset allocation to ensure it is appropriately positioned to take advantage of the markets during the rest of 2010.