After a difficult 2011, we are off to a good start in 2012. The question I wondered after last year's strong first quarter is the same question I am thinking about now: Will the gains we received during the first quarter of 2012 flow through to the end of the year? Will this rally stick or will stocks descend like they did in the second and third quarters of 2011?
The stock market bears would say that corporations have cut their expenses to the bone since 2008 and have, therefore, shown some nice profits over the last few years; however, this earnings growth will not continue because they cannot cut expenses any further and there is no revenue growth due to a global economic slowdown that started in Europe.
The bulls would suggest that the economy is growing at a better clip than what the bears would make you believe. Furthermore, last year at this time we were worried about a double-dip recession in the U.S. and over the past several months we have seen the unemployment rate, while still very high, dip down slightly as more and more jobs are created in the private sector. We have also seen the stock market volatility drop dramatically from last year to this year. According to the Wall Street Journal, "During the first quarter the Standard & Poor's 500-stock index closed up or down more than 1% just seven times." As you will recall that is a huge drop from the third quarter of last year.
As I have mentioned time and again, no one knows what the future holds. While many gurus talk with the "I am right and you are wrong" bravado that is so important when you are a talking head on television or the radio, no one actually knows what tomorrow is going to bring. Most investors would agree that Europe is still not out of the woods yet, even though things have calmed down a bit. The stock and bond markets continue to be influenced on a day-to-day basis of whether Italy, Portugal or Spain have had successful auctions of their bonds. However, I am encouraged that stock mutual fund inflows have not been as robust as many would have expected during similar market rallies. This tells me that investors are looking at this rally with trepidation - they have been burned twice in the last 12 years and don't feel like playing with fire for a third time. I believe this is a healthy view of the market and it bodes well for long-term investors like ourselves.
Even though we witnessed Facebook purchase Instagram, a small mobile phone application developer with 35 million users (but no revenue), for $1 billion over the past several days, I would continue to suggest that long-term wealth is best built on a foundation made up of high quality stocks selling at discount prices.